UNCLAS SECTION 01 OF 03 OTTAWA 001104

SIPDIS

SENSITIVE

STATE FOR WHA, E, WHA/CA, EB/TPP/BTA/EWH, L/LEI

DHS OFFICE OF INTERNATIONAL AFFAIRS (MARMAUD)

STATE PASS USTR (CHANDLER, SHIGETOMI)

USDOC FOR 4320/ITA/MAC/WH/ONIA/BASTIAN/WORD/FOX

E.O. 12958: N/A
TAGS: ECON ETRD ECIN PREL CA
SUBJECT: SCENESETTER: CANADA AND THE SPP

REFS: (A) Ottawa 268; (B) 2004 Ottawa 3431 (C) Ottawa 940;

(D) Ottawa 1029 (E) Ottawa 999


1. (U) This is the first in a series of cables offering
Mission views and background information on elements of the
Security and Prosperity Partnership. This cable outlines
some political and economic factors in Canada that may
affect progress toward SPP goals.


2. (SBU) Summary: The Security and Prosperity Partnership
has met with applause from major groups within Canada,
although some interest groups are critical. On the security
side, we are building on the solid foundation of the Smart
Border process, and Canadian policy will continue to be
driven by the desire to meet U.S. security needs to keep the
border open and moving.

On the prosperity side, the government's course is less well-
charted. A growing anxiety about Canada's continued access
to U.S. markets has fueled a lively debate over the last few
years on how to build on NAFTA, and business groups have
welcomed SPP as the first step on that road. Regulatory
cooperation enjoys broad support from business but will
continue to raise sovereignty concerns among traditional
opponents of freer trade.

Despite GOC commitment to SPP, there are management and
political obstacles on the Canadian side to early major
results. They include potential resistance from the
agencies responsible for making the regulatory changes;
weaknesses in the Canadian regulatory process, and growing
threats to survival of the Martin government. Finally, the
SPP prosperity agenda does not address the elephants outside
the tent: Canadian frustration with NAFTA dispute
settlement and the continuing ban on live cattle imports.
SPP will therefore not necessarily be seen as a major win
for Canada, and the Martin government has not attempted to
sell it as a "big bang" breakthrough. However, a set of
pragmatic and balanced deliverables could create momentum
for continuing and perhaps tackling bigger challenges
through the SPP process.

The Security Agenda: B

road Support, Hard Problems
-------------- --------------

3. (SBU) A broad consensus, and developed bilateral
framework, supports the objectives outlined in the security
agenda. The Smart Border Action Plan, initiated in 2001,
created a successful framework for systematically addressing
border issues. The Smart Border concept enjoys broad
support among business and local governments on both sides
of the border as well as in Ottawa, and has been an
important element in rebuilding public confidence that
security and trade can go hand in hand. The current
government has aggressively reorganized Canadian security
and border agencies and has backed up its commitment to
border security with CAD 1 billion in new funding for border
security in the 2005 budget.


5. (SBU) For the GOC, the hardest part of the border
equation will be addressing infrastructure bottlenecks,
which result as much from trade growth as from new security
requirements, while balancing the interests of a multitude
of provincial, municipal and private stakeholders. The
difficulty of finding popular and affordable solutions to
infrastructure problems makes it likely that the GOC will
continue to look for procedural fixes, such as reverse
clearance and other proposals to move processing away from
the border, some of which may be problematic for us.
Canadian entry procedures for goods also continue to
concentrate processing on the border, making entry more
cumbersome than under the U.S. system.


6. (SBU) While ministers have repeatedly expressed their
determination to prevent terrorist attacks on the U.S. from
within Canada, and have allocated considerable resources to
maritime and aviation security, so far they seem to be less
concerned about potential dangers coming north by land. DPM
McLellan is resisting calls from Canadian customs and law
enforcement unions to beef up or streamline its balkanized
border apparatus, divided between unarmed customs officers
and thinly spread RCMP detachments responsible for
enforcement (Ref C).

Prosperity Agenda: A Path Less Clear
-------------- --

7. (SBU) For the past few years, Canadian officials,
academics and private sector representatives have been
conducting a lively debate on the future of Canada's trade
policy. After ten years of NAFTA, which have shifted
Canada's economy onto an even more pronounced North-South
axis, few people here doubt that relations with the U.S. are
central to Canada's future as a trading nation. The GOC's
efforts to expand markets elsewhere, which include
negotiating initiatives with various Asian and Latin
countries as well as a nebulous framework agreement with the
EU, cannot substantially alter that reality. At the same
time, early, rapid trade gains under NAFTA have moderated;
Canadian exports to the U.S. began to stagnate in the new
millennium and have only recently returned to 2000 levels,
and the rising Canadian dollar has generated anxiety about
future export trends. Having absorbed the early benefits of
NAFTA, many Canadians have begun to focus on its
shortcomings, notably its failure to restrain U.S.
antidumping and countervailing duty actions (despite the
fact that this was never an element of the agreement).
Concern about the "border effect", which predated but was
vastly heightened by 9/11, has shaken Canadian confidence in
the security of its access to its prime export market, and
the BSE crisis and softwood lumber dispute have strengthened
doubts about the ability of NAFTA institutions to protect
Canadian interests.


8. (SBU) Arguments about the best course to pursue with the
U.S. have fallen into two major categories: the "big bang"
and the "incrementalist" approach. In the first category,
groups such as the Canadian Council of Chief Executives have
offered a range of ambitious options, including a "North
American security perimeter" in which border and defense
policies would be harmonized in order to allow trade to flow
freely, and a customs union. The incrementalists, who
include the Canadian Chamber of Commerce, have argued that
no political will exists on either side for grand projects,
and that pragmatically addressing individual barriers one by
one would be more feasible and cost-effective. In that
context, the "prosperity" side of the SPP may be seen as an
endorsement of the incrementalist approach.


9. (SBU) Regardless of their previous positions, major
business groups have applauded SPP and are eager to support
implementation, particularly since they do not want this
initiative to lose momentum. On the regulatory side, the
private sector is solidly in favor of harmonizing North
American standards to the extent possible. The private-
sector Executive Advisory Committee on Smart Regulation (Ref
B.) told GOC policymakers frankly that the norm should be
development of North American standards, even if that meant,
in many cases, adopting U.S. standards.


10. (SBU) This view, however, is not universal. Despite
occasional admissions that some U.S. regulatory mechanisms,
for example in the environmental arena, may well outperform
Canada's, many Canadians tend to assume that Canada is
generally cleaner, healthier and safer than the U.S. (Even
U.S. policies and programs, such as Energy Star, that are
adopted by Canada are often assumed to be of Canadian
origin. In the same vein, Canadian opposition to oil
exploration in ANWR allows many Canadians to feel morally
superior, while ignoring the impact of energy development in
the Canadian wilderness.) The "Smart Regulation" initiative
has already aroused the ire of traditional anti-trade groups
and those concerned about Canadian sovereignty. Sounding a
familiar note, Maude Barlow of the (economic nationalist)
Council of Canadians predicted that SPP would have dire
effects on Canadian sovereignty and the privacy of
individual Canadians. Among other things, she charged that
SPP would "strip Canada of its ability to set safe standards
for its citizens". Mixed press response to SPP also
reflected, along with support for closer engagement,
traditional concerns about sovereignty and distrust of the
U.S.


11. (SBU) Aside from lingering pockets of opposition to
economic integration per se, the GOC may also face a
struggle in moving change quickly through its regulatory
apparatus. While Canadian regulatory processes follow a
process similar to that of the U.S., with PCO retaining the
oversight and coordination role of OMB, central coordination
appears to be considerably weaker. Private sector critics,
among them Smart Regulation advisors, charge that current
regulatory processes are too stovepiped and do not generate
adequate outside input, even from other GOC agencies. The
Smart Regulation program envisions various institutional
changes to address this problem, including a stronger
mandate for PCO, but it remains a work in (early) progress.


12. (SBU) The domestic political atmosphere may also make
it difficult for the GOC to achieve quick progress on
regulatory issues. Martin's minority government has faced
repeated challenges in recent months, with a no-confidence
measure seemingly always around the corner. In the current
round, explosive revelations from an ongoing public inquiry,
pointing to a pattern of government kickbacks to the Liberal
Party, have already distracted the government and could well
result in a vote of no confidence by the end of the year.
The opposition has already flexed its muscles in other
areas. In a major rebuff, Parliament vetoed a government
order separating International Trade Canada from Foreign
Affairs, leaving Canada's trade negotiators in legal limbo
after almost a year of frantic administrative revamping and
personnel shifts. Growing conflict with provinces over
fiscal issues (ref D) will also affect progress on any
broader regulatory reform program. Provinces, which play a
major role in regulation, may resist Ottawa's attempts to
press them into international commitments.

Conclusion
--------------


13. (SBU) Despite these complicating factors, SPP clearly
offers a framework to move forward pragmatically on trade
barriers and irritants and to promote our existing border
agenda. There is potential synergy between SPP goals and
Canada's Smart Regulation initiative. Moreover, SPP can
help fold in and raise the profile of productive bilateral
discussions already underway in areas such as energy,
agriculture and the environment, providing a welcome balance
to endless coverage of trade disputes. We believe it will
remain a priority for the GOC; PCO officials have already
made it clear that they will continue to coordinate and
press Canadian departments for results. (Details on PCO's
plans for organizing the Canadian end of SPP will follow
septel.)


14. (SBU) In the long term, an established process, and the
pressure to produce results in advance of high-level
meetings, can help us attack regulatory issues more
systematically. However, in the meantime the inherent value
of stronger regulatory cooperation is likely to continue to
be overshadowed by the elephants outside the tent: the long-
running dispute over U.S. antidumping and countervailing
duties on softwood and the continued closure of the border
to live cattle imports, which are sapping enthusiasm for
free trade in some of its strongest former constituencies.
The risk remains that voters affected by major trade
problems will resent a bilateral initiative that appears to
require Canadian concessions but does not deliver on their
big concerns, a point we need to take into account as we
develop the SPP agenda.