This record is a partial extract of the original cable. The full text of the original cable is not available.

211216Z Jun 05

UNCLAS SECTION 01 OF 05 OTTAWA 001860 
 
SIPDIS 
 
STATE FOR WHA, WHA/CAN (Holst); H(John Carter) 
 
H PASS 
 
FOR CHAIRMAN GOODLATTE FROM CHARGE D'AFFAIRES JOHN DICKSON 
 
E.O. 12958: N/A 
TAGS: ETRD ECIN EAGR PREL CA
SUBJECT:  SCENESETTER: Your Visit to Alberta, Canada 
 
 
¶1.  I would like to take this opportunity to welcome you and 
House Agriculture Committee members and staff to Canada.  I 
am sure that your visit will be productive and will help us 
advance the agenda on two of our biggest bilateral bilateral 
economic issues. 
 
The Canadian Political Scene 
 
¶2.  Canada's core national problem - accommodating a 
significant French-speaking minority within British-style 
political institutions - dates back to the 1600's, and 
national unity issues in one form or another still provide 
the backdrop for much of what happens in Canadian politics. 
Federal-provincial relations can be fractious.  Although 
provinces have tax authority, provincial leaders complain 
that the federal government's taxation powers exceed its 
responsibilities, and have sought to renegotiate fiscal and 
jurisdictional arrangements, either individually (e.g. on 
offshore oil and gas revenues) or by presenting a unified 
front against Ottawa (e.g. on health care and education 
funding). 
 
¶3.  Paul Martin was elected leader of the Liberal Party and 
became Prime Minister upon the retirement of Jean Chrtien 
in 2003. An election in June 2004 left the Liberals 
precariously leading the first minority government since 
1980 with the uncertain support of the left-of-center New 
Democratic Party (NDP).  They barely escaped an election in 
May after a tiebreaking vote by the normally nonvoting 
Speaker.  Prime Minister Martin has pledged to call an 
election within 30 days after the report next fall of an 
 
inquiry into a scandal over misuse of hundreds of millions 
of dollars in federal "sponsorship" funds in Quebec.  All 
parties seem reluctant to go to the polls in winter when 
weather makes turnout uncertain, so a spring election 
appears more likely.  At this point, it seems likely that 
such an election would yield another, smaller Liberal 
minority, and increase the number of seats held by the 
separatist Bloc Quebecois.  The Official Opposition party, 
the Conservatives, are strongest in western Canada and in 
rural southern Ontario, but have made few inroads in urban 
Ontario or Quebec.  The New Democratic Party of Canada is a 
tiny minority at this point but could be a dark horse in the 
next election. 
 
Canada-US Relations: An Overview 
 
¶4.  Relations with the United States are always front and 
center for Canada.  While our two countries have the world's 
longest undefended border and largest trading relationship, 
Canadians remain protective of their sovereignty and 
national identity and ambivalent about their overwhelming 
dependence on the U.S. economy.   This sensitivity played 
into former PM Chretien's decision not to participate 
directly in the invasion of Iraq, and PM Martin's decision 
not to join the ballistic missile defense program.  (The 
opposition Conservative Party disagreed with both of these 
decisions).  Nevertheless, Canada has troops in Afghanistan 
and is working closely with the U.S. on peacekeeping in 
Haiti, and Canada leads the Iraq donor group. 
 
¶5.  Bilateral economic relations were strengthened by the 
free trade agreements in 1989 (FTA) and 1994 (NAFTA).  Our 
two countries exchange over $1 billion in goods and services 
each day, most of it without significant friction, and 
Canada currently enjoys a bilateral trade surplus with the 
U.S. of nearly $70 billion USD.  Canada is also the United 
States' largest foreign oil supplier, ahead of Saudi Arabia, 
and has the world's second largest petroleum reserves.  In 
2004, Canada exported over 1.6 million barrels of crude oil 
per day to the United States, or about eight percent of 
total U.S. consumption.  Canadian gas and electricity 
exports also play a key role in ensuring the U.S. energy 
supply. 
 
¶6.  Despite our huge and largely trouble-free economic 
relationship, ongoing irritants contribute to a perception 
here that the free trade agreements have failed to achieve 
what Canadian leaders promised:  secure access to the U.S. 
market.  Key Canadian trade concerns include: 
 
--The inability of governments on both sides to restore pre- 
existing trade in beef and live cattle after BSE ("mad cow 
disease") was discovered in a few North American animals 
since 2002. 
 
--"Border risk" - the perception that getting goods across 
the border is getting harder and more unpredictable (in a 
relationship where most goods still cross via land borders). 
While border bottlenecks are due primarily to the doubling 
of bilateral trade since 1989, security measures after 
September 11, 2001 and disruptions related to the SARS 
outbreak in 2003 have contributed to a fear that trade gains 
may be at risk. 
 
-- The failure of a string of negotiations and litigation 
to put an end to a long-running trade dispute over softwood 
lumber, and accompanying irritations over the U.S. "Byrd 
Amendment." 
 
¶7.  On the U.S. side, we have expressed concern about a 
number of continuing or potential trade issues, including: 
 
-- Canadian failure to ratify and enforce key treaties 
protecting intellectual property rights, and weaknesses in 
enforcement of existing Canadian IPR protections; 
 
--supply management policies and other restrictions on 
agricultural trade; 
 
-- continuing regulatory divergence, especially in the food 
area, that force U.S. producers to set up separate 
production runs to sell in Canada. 
 
In addition, longstanding Canadian cultural restrictions on 
television and radio broadcasting, largely excluded from 
NAFTA coverage, continue to restrict the market for U.S. 
audiovisual exports. 
 
The Security and Prosperity Partnership (SPP) 
 
¶8.  In his December 2004 visit to Ottawa, President Bush and 
Prime Minister Martin announced their intent to  strengthen 
security and economic ties and improve North American 
competitiveness.  Under the Security and Prosperity 
Partnership (SPP) announced in Waco last March, the three 
NAFTA partners are working to further strengthen the working 
of the North American economy in a range of incremental ways 
that do not require legislative action.  The SPP 
incorporates our highly successful bilateral "Smart Border 
Action Plan" to improve security at the border while 
expediting low-risk traffic, and seeks to improve 
cooperation in key areas like food safety, motor vehicle 
regulation, and energy integration.  However, the SPP will 
not directly address the lumber or beef disputes. 
 
BSE 
 
¶9.  The ban on live cattle imports into the U.S. from Canada 
has been in effect for over two years. Following a full 
regulatory review process, USDA announced its revised rule 
allowing importation of ruminants and ruminant products and 
by-products from regions that pose a minimal risk of 
introducing BSE into the United States, to take effect on 
March 7, 2005.  The rule would allow imports of Canadian 
cattle less than 30 months of age for immediate slaughter, 
and feeder cattle to be slaughtered before they reach 30 
months of age.  In addition, beef, including bone-in beef, 
from cattle less than 30 months could be imported from 
Canada. 
 
¶10.  However, legal action by the Ranchers Cattlemen Action 
Legal Fund-United Stockgrowers of America (R-CALF) halted 
implementation of the rule. On March 2, 2005, the United 
States District Court granted a preliminary injunction in 
the case of R-CALF versus the USDA.  Hearings in the case 
are expected to start July 27.  Canadian stakeholders are 
dismayed by the further delay in reopening the border, and 
some consider it to be yet one more example of supposed USG 
disregard for Canadian concerns. 
 
¶11.  Canadian government officials understand that the U.S. 
must follow the legal process, and have rejected industry 
calls for a WTO or NAFTA challenge to the continuing ban on 
live cattle imports in favor of an amicus brief in the R- 
CALF legal challenge.  However, the Canadian response has 
become an issue in the struggle between the Liberals and 
Conservatives.  Claiming that the GOC was not adequately 
defending cattlemen's interests, the Conservative Party 
sought independent status as an intervenor in the Montana 
court case.  In the meantime, announcement of a "weak 
positive" test for BSE in a Texas cow has received broad 
press coverage in Canada. 
 
Progress on Canadian Restrictions on U.S. Cattle 
 
¶12.  Longstanding Canadian limits on U.S. exports of live 
cattle have contributed to dissatisfaction among parts of 
the U.S. industry with Canadian import policy and may play a 
role in some U.S. ranchers' opposition to lifting of the 
U.S. import ban.   These issues are on the way to resolution 
following changes in Canadian policy sought by the U.S.. 
 
¶13.  On October 22, 1997, the United States and Canada 
announced a prototype program called the North West Cattle 
Project, later known as the Restricted Feeder Cattle 
Project, to expedite shipments of live cattle from 
participating U.S. states to Canada.  Under the agreement, 
U.S. live cattle exports were limited to a six-month 
shipping season from October 1 to March 31, which has been 
designated a low-risk vector season for bluetongue and 
anaplasmosis.  In March 2004, Canada's Food and Inspection 
Agency (CFIA) announced the removal of testing requirements 
for anaplasmosis and bluetongue from all imported feeder 
cattle from the United States.  Under this rule, U.S. feeder 
cattle from 39 states considered to have a low incidence of 
bluetongue are able to enter Canada directly without 
testing.  Feeder cattle from the remaining 11 states, which 
are considered to have a high incidence of bluetongue, do 
not have to be tested provided they reside for at least 60 
days in a low incidence state prior to export to Canada. 
Testing however, is still an option and should the feeder 
cattle be found free of bluetongue, the 60-day period will 
be waived.  Historically, these high incidence states have 
not exported significant numbers of feeder cattle to Canada. 
In addition, the rule removed the six-month shipping 
restriction to allow exports throughout the year. 
 
¶14.  Canada's announcement on the restricted cattle program 
was long awaited, but it did not translate into immediate 
feeder cattle trade due to restrictions related to BSE.  On 
March 29, 2005 Canada began allowing feeder cattle trade to 
resume under the March 10, 2004 rule.  The rule lifts 
restrictions on imports of U.S. feeder cattle less than 30 
months of age.  When the proposed rule was published, CFIA 
also announced that efforts to expand access to U.S. breeder 
cattle would begin following the publication of a recently 
completed study. 
 
¶15.  U.S. exports of feeder cattle reached nearly 350,000 
head in 2000, but declined to 132,484 head in 2002 due to 
the drought in western Canada.  In 2003, U.S. exports of 
live cattle to Canada fell to 68,000 head and decreased to 
28,000 head in 2004 due to the large number of cattle in 
Canada. 
 
Softwood Lumber 
 
¶16.  Bilateral tensions over softwood lumber exports are now 
entering their third decade (or, some would argue, their 
third century) as a trade irritant.  In the most recent 
round, WTO and NAFTA panels have affirmed our central 
argument that Canadian provincial timber practices, 
including stumpage fees and other measures, constitute 
countervailable subsidies.  Nevertheless, a string of panel 
decisions critical of U.S. methodology and injury findings 
have strengthened the Canadian industry's (and the Canadian 
public's) perception that they are victims of unfair and 
illegal U.S. measures. 
 
 
¶17.  While litigation has yielded victories for both sides, 
it offers little hope of a long-term solution that 
adequately addresses both subsidy and market access issues 
for producers on both sides.  The U.S. has consistently 
called for a long-term negotiated settlement that can 
address the underlying issues.  While negotiations continue, 
U.S. and Canadian industries seemingly remain far apart in 
their view of what constitutes an adequate settlement. 
These differences are compounded by strong and sometimes 
bitter divisions in outlook and interest among Canadian 
provinces that Canadian federal negotiators have sometimes 
found it difficult to bridge. British Columbia, with the 
biggest share of exports, (and over $2 billion in duty 
deposits to recover through a settlement) has generally been 
most disposed toward compromise.  Ontario, Alberta, and 
Quebec have taken a harder line and pushed for aggressive 
litigation in NAFTA and WTO, while the Maritime provinces, 
currently logging primarily from private land and not 
subject to countervailing duties, have fought to remain 
outside any deal that involves numerical limitations. 
 
Your Visit to Alberta: Overview 
 
¶18.  In a period of marked ups and downs in US-Canada 
relations, Alberta remains a bastion of relatively pro- 
American, free market sentiment. Alberta has a history of 
strong U.S. influence and is considered by many to be the 
most "Americanized" province in Canada, due in part to the 
oil and gas boom that drew U.S. firms to the province in the 
early 1900's.   Pro-U.S. sentiment has been sorely tested, 
however, by the suffering generated by the discovery of mad 
cow disease in Canada in 2003 and the continuing closure of 
the U.S. border to live cattle exports, as well as the 
dispute over U.S. duties on softwood lumber exports. 
 
 
Alberta's Politics 
 
¶19.  Alberta is the only province in Western Canada governed 
by the right-leaning Progressive Conservatives (PC), the 
provincial affiliate of the national Conservative Party, 
with Canada's longest serving premier, Ralph Klein, at its 
head.  In each of the provincial elections since 1992, and 
despite dramatic cuts to health and education, Klein and his 
Tory party have captured sizeable majorities, but in 
November 2004, amid growing accusations that Klein and his 
party had become complacent, the party lost 13 seats, 
several in their Calgary stronghold.  Premier Klein 
maintains publicly that he will complete his term, but 
observers predict that he will step down later this year. 
Relations between Alberta and Ottawa are historically 
strained; Klein has, over the years, challenged Ottawa on a 
variety of issues, most notably provincial jurisdiction over 
resource ownership and health care.  Alberta recently 
established its own liaison office at the Canadian Embassy 
in Washington, D.C. (led by former Alberta Energy Minister 
Murray Smith, who will attend Friday's roundtable meetings) 
to promote Alberta's interests directly to Congress and 
executive branch officials. 
 
Alberta's economy 
 
¶20.  Alberta is a growing economic force in Canada, although 
its small population will continue to limit its political 
clout in comparison with Ontario and Quebec, Canada's 
population and industrial centers.  Some 80% of Alberta's 
exports, valued at more than $50 billion, head to U.S. 
markets.  As Canada's energy capital, Alberta produces more 
than 80% of the country's oil and gas needs, providing the 
provincial government with multi-billion dollar budget 
surpluses.  Alberta also supplies more than a million 
barrels per day of crude oil to the U.S., supplying 11% of 
our crude oil imports, or five percent of U.S. oil demand. 
The province also exports more than 2.6 trillion cubic feet 
of natural gas to the U.S., accounting for 62% of U.S. 
natural gas imports, and meeting about 12% of U.S. demand. 
 
¶21.  After energy and finance, agriculture is the third most 
important sector.  Agri-food and forest product exports 
account for approximately $2 billion each.  Alberta is the 
largest cattle producer in the country and the ban on trade 
in live cattle, as well as a temporary ban on boneless beef 
exports to the U.S., due to BSE have cost Canada's cattle 
producers billions of dollars.  All three prairie provinces 
have compensated cattle producers with millions (with some 
funds coming from the federal government), and Alberta has 
since introduced diversification plans to increase slaughter 
capacity in the province. 
 
Softwood Lumber 
 
¶22.  While softwood lumber remains an important part of the 
provincial economy, Alberta is considered a small player 
with about 1.1 billion board feet in exports, well behind 
BC, Quebec, and Ontario.  The forestry products sector, 
including pulp and paper and manufactured items as well as 
lumber, accounts for about 54,000 jobs.  Alberta's softwood 
exports to the United States have declined substantially 
since the imposition of antidumping and countervailing 
duties following the end of the Softwood Lumber Agreement. 
 
 
British Columbia: political overview 
 
¶23.  Premier Gordon Campbell's conservative Liberal Party 
(which is not affiliated with the federal Liberals) achieved 
a historic May 17 win in provincial elections as Campbell 
became the first B.C. premier in 22 years to win a second 
term.  However, his government prevailed with a 
substantially reduced majority, and a decline in share of 
the popular vote from 58% in 2001 to 46%.  Analysts 
attribute the decline in popularity to the party's cutting 
of social services; however, they were buoyed by a strong 
economic performance, driven by low interest rates, high 
commodity prices, aggressive deregulation, and tax cuts.  BC 
Liberals have traditionally emphasized sound trade and 
economic ties with the US. 
 
B.C.'s softwood industry 
 
¶24.  Your meetings with British Columbia officials will 
focus on the softwood lumber dispute.  Lumber is the biggest 
industry in British Columbia, accounting for 17% of 
provincial output and 14% of jobs.   B.C. accounts for over 
half of Canadian softwood exports to the U.S. in the past 
three years and producers there are the biggest and, 
according to industry analysts, the most efficient of 
Canadian softwood producers.  In 2003, B.C. forestry 
officials instituted reforms in timber pricing and 
contracting in coastal regions, leading to closure of a 
number of small mills and restructuring in the industry. 
B.C.'s forest reform plan envisions the eventual opening of 
45% of provincial forests to market-based contracting and 
elimination of clauses obligating timber to be delivered to 
designated sawmills. 
 
¶25.  U.S. antidumping and countervailing duties have also 
spurred B.C. producers to streamline, through capital 
investment in more efficient and larger mills, and through 
mergers and acquisitions worth more than $5 billion.  Record 
lumber prices generated by housing booms in the U.S. and 
Canada have by and large allowed BC producers to increase 
export levels despite duty deposits of up to 27% and the 
2004 rise in the Canadian dollar; B.C. shipped a record- 
breaking 11.4 billion board feet in 2004, outpacing 
exporters in other provinces.  A provincial pine beetle 
infestation may further spur production as provincial 
forestry officials order emergency cuts in infested areas, 
temporarily increasing supply to sawmills. 
 
¶26.  Nevertheless, B.C. producers and provincial officials 
have been among the most eager proponents of a negotiated 
settlement of the AD and CVD cases that would offer them a 
more predictable commercial environment and a clear 
blueprint for acceptable reform that would eliminate the 
risk of future U.S. subsidy findings. They strongly 
supported the U.S. proposal made in December 2003 
(eventually rejected by Canada) that would have imposed 
province-specific export quotas, in part because the 
proposed quota criteria would have locked in their increased 
market share relative to other provinces.    At one point, 
B.C. officials also floated the idea of a province-specific 
agreement with the U.S. You can expect BC officials and 
industry representatives to argue that they have made 
substantial reforms and that we should negotiate a deal that 
would allow a return to full free trade on completion of 
their reform process.