CANADA ECONOMICS

NAFTA

Innovation, Science and Economic Development Canada. January 16, 2018. Canada welcomes report from auto advisor Ray Tanguay. Report demonstrates Canada is on track to make our auto sector as a global leader through key strategic investments

Detroit, Michigan, USA - The automotive industry is one of Canada’s largest manufacturing sectors and is the largest export industry, employing over 530,000 Canadians directly and indirectly. In order to continue supporting this key sector of the economy, the Government of Canada welcomed insights and recommendations from Ray Tanguay in his role as Automotive Advisor to the governments of Canada and Ontario.

Mr. Tanguay presented his report’s findings today to the Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development, and the Honourable Brad Duguid, Ontario Minister of Economic Development and Growth, at the annual meeting of the Canadian Automotive Partnership Council, in Detroit, Michigan.

In Drive to Win, Mr. Tanguay offers his perspective on the Canadian automotive sector and proposes actions to help ensure that Canada can benefit from a larger piece of overall investments in the sector. Mr. Tanguay calls for continued investments in technologies and infrastructure to help validate new innovations, as well as continuing to invest in workplace training, apprenticeships, co-operative programs and the development of technology clusters.

Canada’s investments in the automotive sector align with the Innovation and Skills Plan, the government’s multi-year strategy to create well-paying jobs for the middle class. Through this plan, the government is fostering economic growth and middle-class job creation as well as providing Canadians with the skills they need to succeed.

Quotes

"I want to thank Mr. Tanguay for the work he has done in engaging stakeholders and leveraging their insights. As the automotive sector undergoes massive change with emerging and disruptive technologies, I am pleased to see that Mr. Tanguay’s report recognizes that Canada has taken the right steps to position itself as a location of choice for the design and development of the car of the future."

– The Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development

Quick Facts

• For every single job at an assembly line, six more are created in other sectors of the economy.
• Canada’s automotive industry produces more than 2.4 million vehicles every year. This translates into one car being manufactured every 13 seconds.
• The automotive industry contributes $19 billion to Canada’s gross domestic product.

The Globe and Mail. 16 Jan 2018. Domestic auto competitiveness hinges on tech, talent: study
GREG KEENAN, AUTO INDUSTRY REPORTER DETROIT

For the auto sector to thrive, Canada must remain competitive in manufacturing, develop talented people at all levels, invest in new technology and do a better job of selling itself, a two-year study of the sector concludes.

The report presented on Monday to the Automotive Partnership Council of Canada, an advisory body made up of the industry, labour and government representatives, was undertaken by Ray Tanguay, special automotive adviser to the federal and Ontario governments and a long-time senior executive at Toyota Motor Manufacturing Canada Inc. and Toyota Motor Corp.

“We have an excellent reputation for building quality cars, for an educated work force, for national health care, low corporate taxes and a secure place to live in a diversified culture,” Mr. Tanguay’s report, entitled Drive to Win, concludes. “That story – the story of our strengths – still needs to be told repeatedly because the rest of the world still does not know what we have to offer.”

There are also weaknesses, however, including what he calls high processing costs, driven by labour and electricity charges.

The recent adoption of Bill 148 will hurt Ontario’s case with new investors, the report says. The legislation includes a mandatory allowance of personal emergency-leave days, although the auto industry convinced the provincial government to permit fewer days than other industries.

“When Ontario is compared to other automotive jurisdictions across North America, our local processing costs place us in the middle of the group,” it says. “In targeting prospects for a stronger automotive industry in Canada, we have to understand and remove barriers for investors because in order for Canada to win investments we cannot just be competitive – we need to be better than other jurisdictions south of the border.”

The examination of one of the country’s critical industries – employment of 126,000 in vehicle and components manufacturing and annual exports of $86.5-billion – is the result of more than two years of research, consultation and study of the parts sector, vehicle assembly, technology companies, government programs and the impact of the education system.

Mr. Tanguay was appointed – and his report commissioned – in 2015, after he retired from Toyota. At that time, industry leaders concluded that Canada should create an investment board that would focus on attracting new automotive investment. Instead, the federal and Ontario governments appointed Mr. Tanguay, whose tenure at Toyota included being the driving force behind landing the most recent auto-assembly investment in Canada, the Toyota plant in Woodstock, Ont.

But since that plant opened in the depths of the 2008-09 recession, Canada has not won its usual share of new investment by auto makers. More recently, U.S. President Donald Trump has threatened to tear up the North American free-trade agreement, which would create havoc in an industry that relies on NAFTA to function smoothly and competitively and chill the climate for new investment in Canada.

Navdeep Bains, Minister of Innovation Science and Economic Development said winning new assembly plant investments is still critical to the future of the auto sector in Canada.

“I think there’s a clear recognition of the benefits associated with those investments in Canada. Not only does it strengthen our automotive footprint, but there’s a multiplier of six additional jobs associated with that,” Mr. Bains said after announcing a $49-million federal contribution to a Linamar Corp. project that will create 1,500 jobs over the next 10 years.

The biggest disadvantage Ontario has in trying to attract new automotive investment, Mr. Tanguay said, is the perception that it’s too labour-friendly compared with Michigan and Indiana, for example, which in recent years have become rightto-work states, making it harder for unions to organize workplaces.

“The investments that are taking place now are mostly in the right-to-work states,” he noted.

Two big auto-assembly investments were announced last week in Alabama and Michigan, both right-to-work states.

Toyota and Mazda Motor Corp. said they will build a $1.6billion (U.S.) joint venture assembly plant in Huntsville, Ala., and Fiat Chrysler Automobiles NV said it will spend $1-billion to shift production of a heavyduty pickup truck out of Mexico to a plant in a Detroit suburb. Fiat Chrysler said that move was enabled in part by the Trump administration slashing the corporate tax rate.

A lower corporate tax rate does not affect decisions for new plants, Mr. Tanguay said, but it’s important for some auto makers once the plants are up and running.


His report said Canada needs to maintain a lower tax rate than the United States in order to stay competitive.

The Globe and Mail. 16 Jan 2018. The auto sector needs to do a better job of selling itself in order to compete, a two-year study finds. Auto chiefs bristle at NAFTA content rules. Industry executives doubt proposed content threshold is necessary to address U.S. concerns
GREG KEENAN, AUTO INDUSTRY REPORTER DETROIT

The Trump administration does not need an 85-per-cent North-American-content rule to address concerns about autoindustry jobs flooding to Mexico, Fiat Chrysler Automobiles NV chief executive Sergio Marchionne says.

Mr. Marchionne said his company’s announcement last week that it will shift production of its heavy-duty pickup trucks out of Mexico to Michigan should address “some of President Trump’s concerns about the dislocation of production capacity out of the United States.”

Mr. Trump has threatened to tear up the North American freetrade agreement and has singled out the creation of auto-industry jobs in Mexico as one way the trade deal has damaged the U.S. economy. The Americans have proposed during NAFTA negotiations that North American content be set at 85 per cent in order for vehicles to qualify for dutyfree shipment, and that vehicles made in Canada and Mexico have 50-per-cent U.S. content if they are to be exported to the U.S. market duty-free.

Fiat Chrysler said last week it will invest $2.5-billion (U.S.) in Warren, Mich., and create 2,500 jobs there by shifting production.

“I don’t think we need to go to the 85 number to address what President Trump’s concerns are,” Mr. Marchionne said.

Production was shifted in part because of the danger of NAFTA ending and the U.S. government imposing its so-called “chicken tariff” on imports of pickup trucks from Mexico, Mr. Marchionne acknowledged on Monday during a media roundtable at the North American International Auto Show in Detroit.

“The risk of the so-called chicken tax … would have been almost lethal to the business,” he said. He also noted that it will cost the company more to make the pickups in Warren than in Mexico, but 90 per cent of them are sold in the United States.

“We have found our way of dealing with the issue,” he said.

That move will insulate Fiat Chrysler should NAFTA end and the United States go back to World Trade Organization tariffs. Under the WTO regime, the U.S. tariff on pickup trucks is 25 per cent.

The chicken tariff is also a risk for General Motors Co. as The Globe and Mail reported in October. GM will begin pickup-truck production in Oshawa, Ont., next month, and if NAFTA and the Canada-U.S. free-trade agreement are torn up by the Americans, the 25-per-cent levy will be applied to Oshawa-built pickups sent to the U.S. market.

Dieter Zetsche, chairman of Daimler AG, which owns Mercedes-Benz, said he believes there are very few vehicles assembled in North America that meet the 85-per-cent threshold set by the Americans at the NAFTA negotiating table.

“The question is: Can we get there?” he said to a group of reporters in Detroit.

Mr. Zetsche said the technological change transforming the industry and political uncertainty in various global locations mean the auto maker must be as flexible as possible.

Ford Motor Co. executive vicepresident and global operations president Joe Hinrichs said the Dearborn, Mich.-based company will not reveal publicly whether any of its North American-built vehicles contain 85-per-cent content from the three NAFTA countries.

“We’ve done the math, we’ve done the analysis, I can tell you 85 is a very difficult number for the industry to hit,” Mr. Hinrichs said.

But any new NAFTA agreement should contain a clause preventing currency manipulation, he said.

Ford does not believe Canada and Mexico are manipulating their currencies, but such a clause would serve as a template for other free-trade deals the United States signs, he said.

The imposition of a 25-percent tariff on pickup trucks would not affect Ford, because U.S. assembly plants build all of the company’s pickup trucks.

REUTERS. JANUARY 15, 2018. Major automakers urge Trump administration: don't ditch NAFTA
David Shepardson

DETROIT (Reuters) - Global automakers on Monday urged the Trump administration not to terminate the North American Free Trade Agreement and expressed hope the United States, Canada and Mexico can successfully conclude a modernized and improved trade pact.

Fiat Chrysler Automobiles NV (FCA) Chief Executive Sergio Marchionne, who announced last week plans to shift heavy pickup truck production from Mexico to Michigan by 2020, said he hoped the Trump administration would “retune” some of its trade talk demands.

Trump has threatened to withdraw from NAFTA, which is heavily utilized by automakers that have production and supply chains spread across the three countries.

Marchionne, speaking at a news conference at the Detroit auto show, said FCA’s truck production shift in part “goes a long way I think in addressing some of President Trump’s concerns about the dislocation of production capacity out of the United States.”

That decision reduces the risk those trucks would be hit with a 25 percent tariff if NAFTA unravels.

Ford Motor Co CEO Jim Hackett on Sunday told reporters NAFTA needs “to be modernized,” adding that of Detroit’s Big Three automakers, Ford has the highest percentage of U.S.-built vehicles.

“We’ve got a big commitment to our country and it’s proven in the numbers,” he said.

Unlike General Motors Co and FCA, Ford does not build trucks in Mexico.

GM CEO Mary Barra on Saturday expressed optimism NAFTA will survive with improvements. Other senior GM executives stood by the company’s plans to continue building trucks in Mexico.

MICHIGAN GOVERNOR PUSHES NAFTA

Michigan Governor Rick Snyder, a Republican, met with Vice President Mike Pence in December, urging the administration to improve NAFTA instead of terminating it, which could harm the auto industry.

“That would be a negative for all three countries,” Snyder told reporters after touring the auto show.

Jose Munoz, head of North American operations for Nissan Motor Co, told Reuters the company has boosted U.S. production in recent years.

“No matter what the new NAFTA rules, we will adjust very fast so we can maximize our business,” he said. “The more localized you are the less exposed you are to potential changes.”

Under NAFTA, at least 62.5 percent of the material in a car or light truck made in the region must be from North America to be able to enter the marketplace tariff-free.

The Trump administration has proposed increasing that minimum NAFTA content to 85 percent, with 50 percent made in the United States.

The 85 percent North American content proposal to avoid tariffs is unworkable, Toyota North America Chief Executive Jim Lentz told Reuters.

”There’s not a vehicle that meets that,” he said.

Lentz said since NAFTA was agreed 14 auto plants have been built in the United States – eight by Toyota – and 11 in Mexico.

“It’s not like we are not investing in the United States,” Lentz said.

Marchionne also said the 85 percent figure is not feasible. “I’m hopeful that we’ll see a more rational number going forward and if it is more rational, then I think we’ll be able meet the standard,” he said.

A NAFTA breakup would raise costs, slow demand and put U.S. jobs in jeopardy, Lentz said.

Volkswagen AG VOWG_p.DE brand CEO Herbert Diess said the automaker wasn’t preparing for NAFTA’s demise.

The U.S. auto industry has worked to convince the Trump administration of NAFTA’s importance. In October, major automakers, suppliers and auto dealers launched a coalition to back the agreement.

Reporting by David Shepardson in Detroit; Additional reporting by Nick Carey and Joseph White in Detroit; Editing by Bill Trott

BLOOMBERG. 16 January 2018. How a Nafta Breakdown Could Blow Back Into Shale Patch.  Trump's energy and trade policies are in conflict. He wants energy dominance yet the real demand is in exports.
By Liam Denning

Long before the Trump Administration called for "energy dominance", the pre-election Trump campaign derided the North American Free Trade Agreement. There's a brewing clash between these two populist positions.

Talks to renegotiate Nafta have been going on since last summer and there is growing concern it could unravel altogether.

North America's energy market has been transformed since Nafta came into force in 1994, though more coincidentally than anything else. U.S. fears of scarcity, which accelerated in the first decade of this century, have given way to dreams of energy independence and, of late, "dominance.''  At just under three million barrels of oil equivalent a day, U.S. net imports of oil and natural gas from its two nearest neighbors are now actually back to where they were when Nafta began 1  . But the underlying balances have shifted significantly:

Natural Balance

All in all, assuming everyone stayed friendly, U.S. dependence on fossil-fuel imports from outside North America has fallen to remarkably low levels already. Which might have been fine when the goal was something approximating energy independence. Dominance, however, is all about flogging fossil fuels overseas (see this). And that's where Nafta's demise could present a problem.

"There's this enormous contradiction in the administration's energy and trade policies," says David Goldwyn, an independent energy security consultant who has held senior energy-related posts in several previous U.S. administrations. He continues:

The reality is U.S. energy demand is flat. All the growth is in exports and the trade approach punishes trading partners.

At this point, it's worth emphasizing that Nafta may well survive and, even if it doesn't, this wouldn't automatically mean huge tariffs being slapped immediately on energy-related trading. The three countries' mutual dependence on each other for various bits of the energy value chain -- as seller, buyer, or investor -- offers a strong argument for caution in the aftermath of any breakdown.

That doesn't mean it's without risk, though. A good example of this concerns the engine of U.S. oil production growth: The Permian tight-oil basin. The risk there actually arises in a by-product of that boom: natural gas. As I wrote here, all those fracked oil wells in west Texas also throw off a lot of gas. With supply surging in the U.S. in general, finding a profitable outlet for that gas is getting tougher and exports are a critical safety valve. In west Texas, that mostly means Mexico.

Analysts at Sanford C. Bernstein estimate the amount of Permian gas needing to find a home outside the region could rise from 5.5 billion cubic feet a day last year to more than 11 billion by 2022. Pipelines to other parts of the U.S. can carry 7.3 billion cubic feet a day, which will be maxed out by the middle of 2019.

Filling The Pipe

There is another 3.5 billion cubic feet a day of pipeline capacity linking the Permian basin to Mexico. Several planned export pipelines could add another 7 billion a day from late 2019. Add that all up and there is no problem -- provided it all gets built and used.

As of October, barely any Permian gas was flowing to Mexico. Those export volumes must increase substantially if drillers in the basin aren't to be forced at some point to either flare a lot of gas -- undesirable both environmentally and economically -- or shut-in their wells for want of a pipeline. This could constrain oil production, which could have global implications given the outsize role that expectations about the Permian play in setting oil prices.

An unraveling Nafta could present a danger to gas exports in two ways. First, if the resulting dislocation in Mexico's trade and foreign direct investment slowed economic growth, that could have a knock-on effect in energy demand.

It's also possible that a breakdown in Nafta interferes with planned pipelines. Losing the agreement's protections for foreign investors could deter U.S. companies from deploying dollars south, or create other barriers to moving staff and equipment quickly over the border.

A related question concerns whether a breakdown in Nafta might strengthen nationalists in Mexico opposed to the country's recent energy reforms, which opened the sector to more foreign investment in the first place. Don't forget the wider context: Mexico has a (left-wing) populist of its own leading in the polls for July's presidential election and we're likely to see more utterances about The Wall (and who knows what else about some foreigners) emanating from the White House in the weeks and months ahead.

On this front, however, there is reason for optimism says Dr. Lourdes Melgar, Mexico’s former deputy secretary of energy for hydrocarbons and now a fellow at MIT. She points out that Mexico's energy reforms were enacted via changes to the constitution -- and, therefore, tough to reverse -- and were grounded in rising concerns about energy security, which would hardly be alleviated if Nafta collapsed.

Rather, Mexico may redouble efforts to court more investment in developing its energy sector from European and Asian companies if U.S. firms are deterred. It is notable that, less than a week ago, Mexico's economy minister signed the Convention on the Settlement of Investment Disputes, an intergovernmental organization of the World Bank that offers protection for outside investors. If ratified in Mexico's senate, it would offer some reassurance to foreign energy companies unnerved by Nafta's collapse or the upcoming elections.

By the mid-2020s, with the U.S. and Mexico presumably having diversified their respective export and import options somewhat, a changed trading relationship may matter less to energy markets. Right now, though, the potential for real disruption is there if Nafta, and cool heads, exit altogether.

NOTE

1. Net imports from Canada and Mexico peaked at just over 5 million barrels of oil equivalent a day in early 2006, on a trailing 12-months basis.

WTO

THE GLOBE AND MAIL. REUTERS. JANUARY 16, 2018. Australia takes Canada to WTO over wine-selling rules

GENEVA - Australia has complained at the World Trade Organization about the rules applied to sales of wine by Canada and various Canadian provinces, a WTO filing showed on Tuesday.

"It appears that a range of distribution, licensing and sales measures such as product mark-ups, market access and listing policies, as well as duties and taxes on wine applied at the federal and provincial level may discriminate, either directly or indirectly, against imported wine," Australia said.

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Innovation, Science and Economic Development Canada. January 16, 2018. Government of Canada announces the appointment of a new Chair of the Board of Directors of the Business Development Bank of Canada. Financial industry expert brings his experience to Canada’s only bank for entrepreneurs

Ottawa, ON - The Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development, and the Honourable Bardish Chagger, Leader of the Government in the House of Commons and Minister of Small Business and Tourism, are pleased to announce the appointment of Mike Pedersen as Chair of the Board of Directors of the Business Development Bank of Canada (BDC).

Previous to this appointment, Mr. Pedersen served as President and CEO of TD Bank in the U.S. and occupied many senior leadership roles, including Group Head for TD Bank Group’s wealth and insurance businesses. He was also Managing Director at Barclays Bank (London, U.K.) and Senior Executive Vice President of Retail and Small Business Banking at CIBC. He was formerly Chair of the Canadian Bankers Association and has served on many boards in the private and not-for-profit sectors.

The Government of Canada would also like to thank former chair Samuel Duboc for his service to the Board of Directors of the Business Development Bank and for the important work he performed in creating favourable conditions to grow small businesses in Canada. We wish Mr. Duboc all the best in his future endeavours.

Mr. Pedersen assumes the position of Chair of the Business Development Bank of Canada’s Board of Directors effective March 5, 2018, and will serve for a term of four years. Robert Pitfield, a member of the Board of Directors since May 2014, will act as interim chair until March.

Mr. Pedersen’s appointment was made under the Government of Canada’s open, transparent and merit-based selection process.

Quotes

“The Business Development Bank of Canada services the hard-working entrepreneurs and small business owners who are driving Canada’s economy. I’d like to thank Samuel Duboc for his great work as well as Robert Pitfield for coming on as interim chair. I’d also like to extend a warm welcome to incoming chair Mike Pedersen; I have no doubt that his experience as a financial industry leader will be invaluable to the Board of Directors, the Business Development Bank of Canada and Canadian industry overall.”

– The Honourable Navdeep Bains, Minister of Innovation, Science and Economic Development

“As a proven leader in the financial services sector, Mike Pedersen will bring his invaluable experience to the important work of BDC. BDC is Canada’s only bank dedicated to small businesses, helping them create good middle-class jobs from coast to coast to coast. BDC is working to further modernize its services for women entrepreneurs, and I look forward to working with Mr. Pedersen to achieve our government’s goal of increasing the number of women-owned businesses in Canada.”

– The Honourable Bardish Chagger, Leader of the Government in the House of Commons and Minister of Small Business and Tourism

Quick Facts

• BDC is a Crown corporation that reports to Parliament through Innovation, Science and Economic Development Canada.
• With its 118 business centres across the country, BDC provides businesses in all industries with financing and advisory services.
• BDC is governed by an independent board of directors, which ensures the highest standard of corporate governance practices.

Business Development Bank of Canada: https://www.bdc.ca/en/pages/home.aspx

The Globe and Mail. 16 Jan 2018. Business subsidies need further transparency
JOHN LESTER, Executive Fellow at the School of Public Policy at the University of Calgary

With so much money in play, business subsidies should be reported more transparently and managed more effectively.

The federal government spends about $14-billion a year on business subsidies, and the four largest provinces combined spend slightly more. And, business subsidies represent almost half of the corporate income tax revenue collected in the five jurisdictions.

Surprisingly, given its reputation as a bastion of free enterprise, Alberta is the most prolific subsidizer. In the 2014-15 fiscal year, per person subsidies were $640 in Alberta, about $100 ahead of Quebec – the next most generous jurisdiction. Alberta has probably added to its “lead” through measures introduced in the October, 2015, fiscal update and the 2016 budget. Alberta also stands out by having the least transparent public reporting of business subsidies.

Governments don’t provide this information in a single publication. I arrived at this estimate by combining information from government financial statements, tax expenditure accounts and the annual reports of government business enterprises, supplemented with responses from access to information requests.

What motivates governments to subsidize business? Leaving aside cynical efforts to win votes, business subsidies have two broad objectives: to improve economic performance and to achieve a social objective by supporting specific firms, industries or regions. On average in the five jurisdictions, the split between the two categories is about 70-30 in favour of economic development measures.

Assessing value for money from programs with a social objective is subjective, but measures intended to improve economic performance should be assessed on their ability to raise real income.

In order for business subsidies to raise income, markets have to be doing a poor job allocating labour and capital to their best uses. The classic case is research and development. When a company undertakes R&D, some of the knowledge created inevitably spills over to the benefit other firms. Companies are focused on their own benefits and costs when deciding how much to spend on R&D, not the benefits received by other firms, so society has an interest in encouraging additional R&D. While markets generally do a good job allocating financial capital to its most productive uses, governments express concern about the ability of small firms to access external financing. Just more than half of business subsidies are intended to address these two issues.

Governments also provide subsidies in order to create what are often described as “good jobs,” meaning employment in high-wage, high-productivity industries. But subsidizing “good jobs” will only boost real income if workers receive a premium for their skills in the subsidized sector. There is ample evidence that wages differ by sector even after differences in worker skills and working conditions are taken into account. That opens up the possibility that subsidizing high-wage jobs will make us better off. Almost 10 per cent of business subsidies are pursuing “industrial policy” objectives.

But real income won’t necessarily go up, even in these circumstances. Benefit-cost analyses of key programs suggest that, at best, only a third of subsidies intended to raise real income achieve their objective. The main reason these subsidies are unsuccessful is that they have to be funded, either by raising taxes or cutting government program spending, both of which harm economic performance. And avoiding the pitfall of excessive subsidization can be challenging. For example, small firms performing R&D get about 43 per cent of their funding from governments, which is, according to my own research, substantially beyond an effective level.

Industrial policy measures are particularly tricky to get right. The first hurdle is to identify sectors or firms that pay workers a premium for a given set of skills and working conditions. The next hurdle is to avoid excessive subsidization. A permanent subsidy that exceeds the wage premium will obviously harm rather than help economic performance, as the higher taxes required to finance the subsidy blunt incentives to work, save and invest. A temporary subsidy can exceed the wage premium, but governments need to have the discipline and foresight to end the subsidy soon enough to generate a net gain. Finally, even if real income rises, the distribution of benefits and costs is an issue. Subsidizing good jobs benefits high-income individuals and if the subsidy is financed out of general tax revenue, lower income taxpayers will contribute to its fiscal cost.

With so much money in play, business subsidies should be reported more transparently and managed more effectively. For greater transparency, governments should prepare a comprehensive annual report on business subsidies delivered through program spending, the tax system and through the activities of government business enterprises. The report would describe the programs, state their objectives and report funding levels. When discussing program objectives, the report should set out in general terms the expected benefits and costs of government intervention and discuss who benefits from the measure and who is expected to pay for it. Making a commitment to set out the expected benefits and costs of all new business subsidies as they are introduced may prevent the worst offenders from being implemented in the first place.

Increased transparency would set the stage for better evaluations of subsidies. While government departments have demonstrated an ability to assess program efficiency objectively, in-house reviews of program effectiveness or success in meeting objectives quickly come up against a fundamental conflict. A truly independent assessment runs the risk of contradicting the responsible minister and may implicitly call for a change in policy. A better approach would be to fund an independent organization, such as the Parliamentary Budget Officer at the federal level, to assess the effectiveness of business subsidies.

FOREIGN POLICY

The Globe and Mail. 16 Jan 2018. China, Russia take aim at North Korea summit. Summit: Russia’s Lavrov calls meeting ‘destructive’
ROBERT FIFE, VANCOUVER, OTTAWA, BUREAU CHIEF
WITH A REPORT FROM THE CANADIAN PRESS

U.S. officials have said the meeting will look at ways to crack down on smuggling and money-laundering schemes that Pyongyang has used to evade UN sanctions, including the question of whether to intercept North Korean shipping.

Trudeau acknowledges that both countries are needed for any long-term solution, but Vancouver talks without them are a chance to look at options to resolve conflict

Western foreign ministers attending a Vancouver summit acknowledge that a diplomatic solution to the North Korea nuclear threat can’t be accomplished without China and Russia even as they examine new measures to pressure Pyongyang to the negotiating table.

China and Russia have bluntly criticized the Vancouver talks, cohosted by Foreign Affairs Minister Chrystia Freeland and U.S. Secretary of State Rex Tillerson, as too focused on sanctions and not enough on the need to defuse the crisis through concerted dialogue.

A senior Canadian official defended the decision to exclude Moscow and Beijing, saying this is a meeting of like-minded countries seeking to review how United Nations sanctions can be strictly enforced against North Korea.

In a background briefing for reporters on the eve of Tuesday’s talks, the official said any longerterm resolution to curb North Korean leader Kim Jung-un’s nuclear ambitions would have to involve Russia and China. Both countries sit on the United Nations Security Council and are neighbours of North Korea. Prime Minister Justin Trudeau also acknowledged on Monday that the Korean conflict requires the involvement of Russia and China, and said Vancouver is simply an opportunity to look at options to “resolve the conflict.”

U.S. officials have previously said Russia and China were supportive of the summit, but Russian Foreign Minister Sergey Lavrov called that an “outright lie” on Monday and said the meeting was “destructive.”

He scoffed at the list of 20 Western countries invited to Vancouver, all of whom were involved in the 1950-53 Korean war.

“When we found out about this meeting, we asked: Why do you need all those countries together?” Mr. Lavrov told reporters in Moscow. “Greece, Belgium, Colombia, Luxembourg. What do they have do with the Korean Peninsula.”

Last week, China also dismissed the meeting as “meaningless” and focused on efforts to “blindly resort to pressure and isolation” rather than “dialogue” with the Kim regime.

Mr. Lavrov said Canada had invited officials from Russia and China to be briefed on the talks after they concluded but they turned down the proposals. The Canadian official did not dispute Mr. Lavrov’s statement but said Canada and the United States will brief China and Russia after the talks end Tuesday.

U.S. officials have said the meeting will look at ways to crack down on smuggling and money-laundering schemes that Pyongyang has used to evade UN sanctions, including the question of whether to intercept North Korean shipping.

The Canadian official did not rule out Canada’s navy taking part in efforts to block ships from delivering oil and other embargoed goods to North Korea.

General Jonathan Vance, Chief of the Defence Staff, told The Globe and Mail on Friday that he has “the military capability inside the Armed Forces” to participate in any effort to ensure compliance with UN sanctions.

Foreign ministers in Vancouver will also discuss how the international community can track ships as well as blacklisting ships that break the UN sanctions embargo.

New UN sanctions adopted last month authorize member states to inspect, seize and impound any vessels in their territorial waters found to be transporting embargoed goods to North Korea. In December, South Korea seized two ships carrying oil to the North.

Korean experts agree that the talks will accomplish very little without China and Russia at the table.

“The Vancouver meeting will mostly focus on oil shipments because that is where the international community has some type of leverage but again it is not including the major actors on the North Korea issue and that is Russia and China, so even this goal is unlikely to be achieved,” according to Agathe L’Homme, an analyst with The Economist Intelligence Unit.

Ms. L’Homme said another problem with the Vancouver summit is the lack of a clear U.S. position on North Korea. Mr. Tillerson has talked up diplomacy while U.S. President Donald Trump and hawks within the White House have raised the possibility of a military strike against North Korea’s nuclear facilities.

“The big issue remains the U.S. position and that remains very unclear,” she said. “To bring North Korea to the table would be to have a consistent U.S. policy and that is not the case as long as Donald Trump has access to Twitter and Rex Tillerson himself has been rumoured to be pushed out.”

The North Korean leader has shown no willingness to give into U.S. demands and negotiate away his nuclear-weapons program which he sees as vital to his regime’s survival.

Len Edwards, a former Canadian ambassador to South Korea, said Ms. Freeland should try to play a role behind the scenes to convince the Americans that they have to live with a nuclearized North Korea and to look for ways to defuse tensions and contain Mr. Kim’s weapons programs.

“It is a tough discussion to have because no one wants to move to the admission that North Korea has reached the point where they have, in effect, reached or will shortly have all the attributes of a nuclear state whether we like it or not,” Mr. Edwards said in an interview Monday.

Ms. L’Homme said it is possible North Korea could accept a freeze on its ballistic missiles and a cap on its nuclear warheads in exchange for an end to joint U.S.-South Korean military exercises and talks that lead to greater co-operation between the two Koreas on culture, sports and the economy.

U.S. Defence Secretary James Mattis and Canadian Defence Minister Harjit Sajjan attended a ministerial dinner Monday evening – a sign that the military option remains open to the United States.

But the goal of the foreign ministers’ meeting is to avoid a military showdown with North Korea by taking steps to prod Mr. Kim to the negotiating table for meaningful talks.

NDP foreign affairs critic Hélène Laverdière on Monday called on Ms. Freeland to “making abundantly clear that diplomacy is the best course of action” especially in the face of Mr. Trump’s “dangerously bellicose rhetoric.”

THE GLOBE AND MAIL. JANUARY 15, 2018. OPINION. Vancouver’s Korea conference must focus on long-term solutions
LEN EDWARDS, CONTRIBUTED TO THE GLOBE AND MAIL. Len Edwards is a distinguished fellow at the Centre for International Governance Innovation, Canadian co-chair of the Canada Korea Forum and a former deputy minister of Foreign Affairs.

You have to give the Trudeau government, and energetic Foreign Affairs Minister Chrystia Freeland, good marks for their initiative to co-host with the United States the conference on Tuesday in Vancouver on the North Korean crisis.

This will sound like ancient history to today's officials and politicians, but in the early 1990s Canada led (and the government financed) a group of academics and others from a number of regional countries to engage North Korean officials in a non-confrontational setting. This North Pacific Co-operative Security Dialogue was a unique "open door" for bringing North Koreans out of the isolation of Pyongyang and engaging them on security issues just as the country was embarking on its journey to develop nuclear weapons.

Our decision after a few years to end the dialogue removed Canadians from any further significant engagement on North Korea. As Canada's ambassador to Seoul at the time, I felt that while the initiative was small in the bigger scheme of things, it had real value. Left to run its course, the dialogue may have helped lead the North Korean regime on a less confrontational course, and reduced its obsessive fear for its own security.

Communication out of Ottawa about this week's conference has been very limited. Is this meeting the result of a decision by the government to look for a place where Canadian diplomacy can be helpful? If so, the search may have been an arduous one over the past months. The complexities of the situation on the Korean peninsula are daunting, the strategic stakes are higher than ever before and volatility is at an unprecedented level.

And the mood among players such as the United States and China (and North Korea) may not have been conducive to new ideas proposed by well-meaning outsiders.

At the 15th Canada-Korea Forum held in Canada this past October, a group of senior academics, former officials and others felt otherwise. Although the nuclear situation in the North was judged as very serious, our South Korean participants thought there was still time for Canada to work with other countries skilled in successful mediation and diplomacy to investigate new paths to defuse tensions: to find solutions that met the security interests of both South and North Korea, as well as the other key regional powers involved — China, the United States, Russia and Japan.

Perhaps the apparent choice of theme in Vancouver – to focus on the nuclear threat posed by the North – was the government's intention from the outset. If not, involving the Americans as co-hosts probably reduced the options considerably. In recent days, the American co-hosts have asserted that the conference will look at ways to bring additional pressure on North Korea to halt its journey to nuclear power status with an ICBM capability. This has provoked a predictably strong and unfortunate reaction from an uninvited China (and Russia).

The invitation list is problematic. Although it is one solution to the always-daunting challenge of "who to invite," it allows North Korea, China and Russia to argue that its "adversaries" from the United Nations-approved action almost 70 years ago are reconvening to discuss the future of the peninsula without them.

This raises exponentially the difficulty of getting co-operation from these players post-Vancouver.

As important as curbing North Korea's nuclear plans are, we should hope that foreign ministers at the Vancouver Conference, led by Ms. Freeland, will still take time behind closed doors to look at the options for diplomatic formats and longer-term solutions beyond the nuclear issue.

The Vancouver conference is an important initiative for Canadian diplomacy, particularly our reputation for effective re-engagement in Asia Pacific affairs and for finding ways forward on the Korean Peninsula. Much is at stake. The government should be congratulated for the courage of taking this on and for working with the United States as co-host. Let's hope, however, that the conference has an open door to new ideas, not a closed one.

BLOOMBERG. 16 January 2018. U.S. Seeks North Korea Sanctions at Summit Without China, Russia
By Nick Wadhams

• Passengers on commercial flight saw missile test: Tillerson
• Russia and China not invited to foreign minister’s event

U.S. Secretary of State Rex Tillerson called on other nations to tighten sanctions on North Korea -- including by stopping ships at sea -- until Kim Jong Un’s regime agrees to begin negotiating an end to its nuclear weapons program.

“Let me be clear -- we will not allow North Korea to drive a wedge through our resolve or solidarity,” Tillerson told allied foreign ministers gathered at a meeting Tuesday in Vancouver to discuss the issue that didn’t include China or Russia. “The pressure campaign will continue until North Korea takes decisive steps to denuclearize.”

Tillerson also said that at least one North Korean missile test -- in November 2017 -- was witnessed by passengers on a commercial airline flight from San Francisco to Hong Kong, highlighting what he called the “threat to all nations” posed by the regime.

“Based on its past recklessness, we cannot expect North Korea to have any regard for what might get in the way of one of its missiles, or parts of a missile breaking apart,” Tillerson said.

The top U.S. diplomat went on to reject any proposal calling for a “freeze” on U.S.-South Korean military drills in order to get talks started, a recommendation repeatedly made by China and Russia. Kim’s regime has said its weapons program is essential to its survival and has repeatedly said the U.S.’s joint drills with South Korea threaten it.

Not Invited

The Vancouver meeting included representatives from co-host Canada, France, Japan, the U.K., Belgium, Denmark and Thailand. But it’s unclear how much the gathering will be able to achieve because Russia and China, the two countries that give North Korea its biggest financial lifeline, weren’t invited.

Referring last week to Kim’s repeated missile and weapons tests, Russian President Vladimir Putin said the North Korean leader has “won this match” in the contest to acquire nuclear weapons.

A focus of the Vancouver meeting, according to State Department officials, will be clamping down on North Korea’s ability to evade United Nations sanctions through smuggling, with the goal of bringing the regime to the negotiating table to work on a deal to give up its nuclear-weapons program.

One focus of that effort will be on maritime interdiction -- stopping ships from bringing goods to and from North Korea. Brian Hook, Tillerson’s chief of policy planning, said that may include getting the UN to block port access for some ships known to be involved in that trade. The U.S.-led pressure campaign has also sought to persuade countries to expel North Korean diplomats and cut any remaining ties to the country.

“The international community must be united in its approach,” U.K. Foreign Secretary Boris Johnson said ahead of the meeting. “Sanctions are biting, but we need to maintain diplomatic pressure on Kim Jong Un’s regime.”

The Vancouver meeting also highlighted tensions in the international community. In a briefing to reporters Monday, Russian Foreign Minister Sergei Lavrov called the meeting “destructive,” while China’s foreign minister described it as a “meaningless” exercise meant to “blindly resort to pressure and isolation” instead of dialogue.

President Donald Trump spoke with China’s President Xi Jinping on Tuesday. A White House readout of the call said the two expressed hope that the resumption of talks between the two Koreas “might prompt a change in North Korea’s destructive behavior.” The readout didn’t mention the Vancouver talks.

Winter Olympics

There’s also some division among the allies. Japan, for example, has been wary of any rapprochement with North Korea, wanting to keep talks focused only on the nuclear issue.

The U.S. argues that its pressure campaign against North Korea is working, and Trump took credit last week for a resumption of talks between Pyongyang and Seoul. Those discussions have been limited to planning for North Korea to send a delegation to next month’s Winter Olympics in Pyeongchang, South Korea.

Those talks, initially heralded as a breakthrough and a way to ease tensions, are causing new strains. North Korea’s Korean Central News Agency warned Sunday that an effort by South Korea to link reconciliation to denuclearization were “ill-boding” and risked “chilling the atmosphere.” The two nations, which are still technically at war, have agreed to hold military talks and further high-level dialogues.

ENERGY

REUTERS. JANUARY 16, 2018. U.S. oil industry set to break record, upend global trade
Liz Hampton

HOUSTON (Reuters) - Surging shale production is poised to push U.S. oil output to more than 10 million barrels per day - toppling a record set in 1970 and crossing a threshold few could have imagined even a decade ago.

And this new record, expected within days, likely won’t last long. The U.S. government forecasts that the nation’s production will climb to 11 million barrels a day by late 2019, a level that would rival Russia, the world’s top producer.

The economic and political impacts of soaring U.S. output are breathtaking, cutting the nation’s oil imports by a fifth over a decade, providing high-paying jobs in rural communities and lowering consumer prices for domestic gasoline by 37 percent from a 2008 peak.

Fears of dire energy shortages that gripped the country in the 1970s have been replaced by a presidential policy of global “energy dominance.”

“It has had incredibly positive impacts for the U.S. economy, for the workforce and even our reduced carbon footprint” as shale natural gas has displaced coal at power plants, said John England, head of consultancy Deloitte’s U.S. energy and resources practice.

U.S. energy exports now compete with Middle East oil for buyers in Asia. Daily trading volumes of U.S. oil futures contracts have more doubled in the past decade, averaging more than 1.2 billion barrels per day in 2017, according to exchange operator CME Group.

The U.S. oil price benchmark, West Texas Intermediate crude, is now watched closely worldwide by foreign customers of U.S. gasoline, diesel and crude.

The question of whether the shale sector can continue at this pace remains an open debate. The rapid growth has stirred concerns that the industry is already peaking and that production forecasts are too optimistic.

The costs of labor and contracted services have recently risen sharply in the most active oilfields; drillable land prices have soared; and some shale financiers are calling on producers to focus on improving short-term returns rather than expanding drilling.

But U.S. producers have already far outpaced expectations and overcome serious challenges, including the recent effort by the Organization of the Petroleum Exporting Countries (OPEC) to sink shale firms by flooding global markets with oil.

The cartel of oil-producing nations backed down in November 2016 and enacted production cuts amid pressure from their own members over low prices - which had plunged to below $27 earlier that year from more than $100 a barrel in 2014.

Shale producers won the price war through aggressive cost-cutting and rapid advances in drilling technology. Oil now trades above $64 a barrel, enough for many U.S. producers to finance both expanded drilling and dividends for shareholders.

BOOMING OIL EXPORTS

Efficiencies spurred by the battle with OPEC - including faster drilling, better well designs and more fracking - helped U.S. firms produce enough oil to successfully lobby for the repeal of a ban on oil exports. In late 2015, Congress overturned the prohibition it had imposed following OPEC’s 1973 embargo.

The United States now exports up to 1.7 million barrels per day of crude, and this year will have the capacity to export 3.8 billion cubic feet per day of natural gas. Terminals conceived for importing liquefied natural gas have now been overhauled to allow exports.

That export demand, along with surging production in remote locations such as West Texas and North Dakota, has led to a boom in U.S. pipeline construction. Firms including Kinder Morgan and Enterprise Products Partners added 26,000 miles of liquids pipelines in the five years between 2012 and 2016, according to the Pipeline and Hazardous Materials Safety Administration. Several more multi-billion-dollar pipeline projects are on the drawing board.

U.S. drillers say they can supply plenty more.

“We continue to see and drive improvements” in drilling speed and efficiency, said Mathias Schlecht, a technology vice president at Baker Hughes, General Electric Co’s oilfield services business.

New wells can be drilled in as little as a week, he said. A few years ago, it could take up to a month.

TECHNOLOGY OPENS UP NEW FIELDS

The next phase of shale output growth depends on techniques to squeeze more oil from each well. Companies are now putting sensors on drill bits to more precisely access oil deposits, using artificial intelligence and remote operators to get the most out of equipment and trained engineers.

As expanded investments push more producers to add wells in less productive regions, technology will help make those plays more profitable, said Kate Richard, chief executive of Warwick Energy Group, which owns interests in more than 5,000 U.S. wells.

In an interview, she estimated about a third of the money from private equity investments in shale will be used to wring more oil from overlooked regions.

Higher prices - up about $10 a barrel in the last two months - also may encourage the industry to work through a backlog of some 7,300 drilled-but-uncompleted shale wells that have built up because of crew and equipment shortages.

The higher prices have suppliers that provide hydraulic fracturing services, such as Keane Group and Liberty Oilfield Services, buying expensive new equipment in anticipation of more work.

U.S. fracking service revenues are expected to grow by 20 percent this year, approaching a record of $29 billion set in 2014, according to oilfield research firm Spears & Associates.

OIL MAJORS JOIN SHALE FRAY

The shale revolution initially upended the traditional industry hierarchy, making billionaires out of wildcatters such as Harold Hamm, who founded Continental Resources, and the late Aubrey McClendon of Chesapeake Energy.

Top U.S. oil firms such as Exxon Mobil and Chevron a decade ago turned much of their focus to foreign fields, leaving smaller firms to develop U.S. shale. Now they’re back, buying shale companies, land and shifting more investments back home from overseas.

Exxon last year agreed to pay up to $6.6 billion for land in the Permian basin, the epicenter of U.S. shale. Chevron this year plans to spend $4.3 billion on shale development.

The majors’ shift is driving up costs for labor and drillable land in the region, another boost to wages and wealth in rural areas.

In the shale industry hub of Midland, Texas, unemployment has fallen to a mere 2.6 percent, said Willie Taylor, executive director of the Permian Basin Workforce Development Board, a group that helps firms find staff.

Companies are now offering signing bonuses to attract workers to West Texas. One oil company flies workers to Midland from Houston weekly to fill a local labor void, he said.

“It was an employer’s market,” he said. “Now it’s more of a job seeker’s market.”

Additional reporting by Ernest Scheyder; Editing by Gary McWilliams and Brian Thevenot

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LGCJ.: