Rhys Mendes
Rhys Mendes spoke 88 times across 1 day of testimony.
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Rhys Mendes, ADM (GC-FIN)
I'll swear on the Bible.
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Rhys Mendes, ADM (GC-FIN)
Rhys Mendes, R-H-Y-S M-E-N-D-E-S.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
Yes, I'm Assistant Deputy Minister for Economic Policy in the Department of Finance. I report to Mr. Sabia. My branch is divided into two divisions. The first division focusses on assessing the current state of the economy, monitoring the evolution of the economy in the near term, and assessing the economic outlook. That was the division that was involved in assessing the economic impact of the blockades. The second division focusses more on longer term research and analysis of structural issues and policy issues affecting the Canadian economy.
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Rhys Mendes, ADM (GC-FIN)
Yes. I mean, the second one was an updated version of the first, ---
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Rhys Mendes, ADM (GC-FIN)
--- but yes.
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Rhys Mendes, ADM (GC-FIN)
I shared them with Mr. Sabia. I -- you’d have to ask him beyond that.
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Rhys Mendes, ADM (GC-FIN)
Yeah, so I would say the principal source of information that we were receiving was from Transport Canada. There was information on the amount and type of trade that was disrupted, or potentially disrupted. And there was also Transport Canada’s analysis on the impacts of the trade disruptions on economic activity.
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Rhys Mendes, ADM (GC-FIN)
It was, yes.
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Rhys Mendes, ADM (GC-FIN)
Well, as you said, I didn’t produce the specific scenarios, and we relied specifically in our quantitative work on the first scenario.
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Rhys Mendes, ADM (GC-FIN)
The first scenario really focuses on a shutdown in the automotive sector, that -- a shutdown in the automotive sector that is -- the logic of that, I believe, is really the just-in-time nature of inventory management in the automotive sector. So in the automotive sector, you know, a short disruption to transportation -- because it’s so integrated across the Canada-US border, a short disruption to transportation, even if there’s rerouting possible, can cause disruptions, because oftentimes trucks are making multiple trips back and forth between plants. And so just an added couple of hours can disrupt the timelines, cause drivers to time out, in terms of the amount of time they can safely and legally drive. So that’s why I think they focused on the ---
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Rhys Mendes, ADM (GC-FIN)
Yeah.
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Rhys Mendes, ADM (GC-FIN)
So it’s a form of inventory management in which, in the case of an auto plant, the various parts that they need to produce the automobiles that they’re building at the plant come in literally just in time to be used in the production process, so they don’t store a stock of inventories to any great extent. So, really, even a 24-hour disruption to sort of the flow of these inputs can cause production to shut down, or at least be reduced.
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Rhys Mendes, ADM (GC-FIN)
Yeah, and it allowed for other sectors, I think they’d -- they assumed that they could largely mitigate the effects of the blockade and continue to operate fairly normally.
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Rhys Mendes, ADM (GC-FIN)
Yeah, so Scenarios 2 and 3 really focus on an escalation. So Scenario 2 expands to take account of other manufacturing sector -- other parts of the manufacturing sector, beyond automobiles. These sectors also rely a lot on trade across the Canada-US border. They are somewhat less reliant -- they tend to have more inventories in stock, and so they can continue for somewhat longer than the automobile sector before they face large shutdowns. So I sort of think of that second scenario as, you know, had the blockades continued, you could start to move into that second scenario. And then the third scenario is a case where really the -- it becomes very difficult to reroute, difficult or impossible to reroute around the blockades. And in that case, they -- the shutdowns become more widespread across the economy.
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Rhys Mendes, ADM (GC-FIN)
My recollection is that that - - those emails were around February 14th, and so that was after the situation at the Ambassador Bridge had been resolved. And so I think that there was a clear direction at that point, in terms of -- so I think that it was the additional information that they had ---
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Rhys Mendes, ADM (GC-FIN)
--- at that point that allowed them to have that view of Scenarios 2 and 3.
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Rhys Mendes, ADM (GC-FIN)
Scenario 1 we used as the basis for our main approach, in terms of thinking about the economic impact, so yes. I mean, I think Scenario 1, you know, didn’t play out perhaps exactly as it was modelled, but largely as it was modelled.
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Rhys Mendes, ADM (GC-FIN)
So this is the February 10th ---
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Rhys Mendes, ADM (GC-FIN)
--- version. So in this version we really focused on highlighting, number one, the amount of trade that was at risk; the fact that at the Ambassador Bridge alone, 30 percent of all road trade between Canada and the US crosses that bridge alone. Every year about 390 million goods crossing each day. That, to us, was the thing that we wanted to focus on in terms of communicating just how much the risk was in terms of a prolonged disruption there, a prolonged disruption there that causes a prolonged disruption in trade traffic, and therefore a significant impact on economic activity. I believe we also highlighted -- if you can scroll down. Can we scroll down a bit further, please? Yeah, so at the end of that last paragraph, we also highlight the reputational risk that several U.S. lawmakers had pointed the situation to argue for “Buy America” policies and other protectionist policies, which would mean less reliance on buying goods from Canada and obviously would have an adverse impact on Canada, even over the longer term.
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Rhys Mendes, ADM (GC-FIN)
We did not attempt to quantify the impact in this document.
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Rhys Mendes, ADM (GC-FIN)
Well the situation was fluid. So at this stage, you know, quantifications would have been what if scenarios. And I think that the -- you know, quantifying sort of what ultimately happened, which was, you know, a limited, more short-lived disruption, wasn’t really going to convey the larger point. And the larger point was really that the risk that, you know, if these -- if the blockades spread or if they persisted, that there would be a very significant impact on economy activity, and that there was a building reputational impact.
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Rhys Mendes, ADM (GC-FIN)
Could I just add something to that?
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Rhys Mendes, ADM (GC-FIN)
In thinking about the quantitative impact, so we actually, as part of what we do on a regular basis, we monitor economic activity in the Canadian economy. So that means we try to come up with a view of what economic activity is in the current quarter, so before Statistics Canada puts out the official statistics and it will be in the next quarter. And we rely on various high frequency data to do that, but we’re also look at significant events that may have an impact. And so part of, you know, our ultimate quantitative assessment of the GDP impact was to feed into that monitoring process, but of course that requires having a more concrete sense of how the situation is playing out than we had at this stage.
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Rhys Mendes, ADM (GC-FIN)
Yeah, so the Ambassador Bridge was completely shut down at this point, but there were other bridges nearby through which traffic was being rerouted. I mean, you can see that in the statistics in terms of the increases in traffic at other bridges, which I believe is later in this document.
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Rhys Mendes, ADM (GC-FIN)
Increases in traffic at other nearby bridges. We say most manufacturers here, and that’s because, as I was saying earlier, it specifically, within the set of manufacturers, it’s specifically auto production that tends to have -- tends to carry very little in terms of inventory on hand, and so is most at risk of being disrupted very quickly. So as you’ll note, the last sentence of the paragraph you were referring to, we were already seeing some plants starting to see reduced production.
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Rhys Mendes, ADM (GC-FIN)
And the context, as Mr. Sabia alluded to earlier -- okay. The context here was that auto production had been adversely affected prior to this by shortages in semi-conductors, principally, and so we were coming into this after a period where we already hadn’t been producing as many autos as we normally would have. And that was having an obvious effect on the market. Anyone who went to buy a car would have noticed that.
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Rhys Mendes, ADM (GC-FIN)
In terms of the economic impacts, we believe the border blockades posed the greater risk.
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Rhys Mendes, ADM (GC-FIN)
Yeah, so the impacts -- the impacts of the border blockade, because the effected sectors have linkages to the -- greater linkages to the rest of the economy, did have the potential to have much broader effects.
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Rhys Mendes, ADM (GC-FIN)
Yeah. So there’s a distinction here between short delays, ---
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Rhys Mendes, ADM (GC-FIN)
--- and a short disruption, and a longer disruption.
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Rhys Mendes, ADM (GC-FIN)
And the reason is, so if you imagine an auto plant, for instance, if they lose a short period of production, it may be feasible to make that up to a significant extent in subsequent weeks, but there’s a limit to how much production can be made up because, you know, there’s only 24 hours in a day, people can only work so much, you can only work the plant for 24 hours a day at most. And, you know, even that there are limits, because there’s downtime needed for maintenance, et cetera. So a short production -- a short disruption to production, it’s possible to make that up. It’s not free, because, you know, there’s a reason that the plants and the workers weren’t working those extra hours to begin with. Most likely, you know, there’s time needed to maintain the plant, for people to rest, et cetera. But it is possible, with a short enough disruption, to make up at least some of the lost production. With a longer production, as the amount of loss production accumulates, it just becomes more and more difficult to actually feasibly make that up, given the constraints in terms of how much you can actually increase production once the disruption ends.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
Yes. So the level of GDP is essentially what you just described; the flow value of the goods and services produced in an economy during a period of time. The growth rate is the change in that level between two different periods.
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Rhys Mendes, ADM (GC-FIN)
I should say the growth level if the change in the level between two different periods expressed as a percentage.
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Rhys Mendes, ADM (GC-FIN)
Yeah. So it’s basically reducing the rate of growth by .1 percentage point in this case, is what they’re saying. And what -- I don’t know exactly what they mean by “drag” because my recollection is that the Bloomberg article in question doesn’t specifically lay out the methodology and detail. But I would suspect it means the impact on the sectors that are directly affected by the trade disruptions.
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Rhys Mendes, ADM (GC-FIN)
Yeah. And so, again, I don’t know what that means. That language often -- indirect is often used to refer to the impact of a disruption in one sector as it spreads through the economy onto other sectors.
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Rhys Mendes, ADM (GC-FIN)
I don’t recall having a specific view at the time on the Bloomberg estimates. I’ll say part of what you’re seeing here is just in the normal course of, you know, assessing all of the incoming information, we do try to play a bit of a challenge function, and I think, you know, and trying to take a sceptical view of things in order to assess the validity of a given number. And over time, you know, as more information comes in, that can change. I think the .1, you know, that ended up being, you know, in the same vicinity as the sorts of numbers we came up with. If you add up the .1 plus the .2 to .3 and get .3 to .4, that ends up being a larger number than what we came up with. But of course that -- we hadn’t done that analysis at this point. So at this point they were just trying to sort of have a discussion around what they thought of these numbers.
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Rhys Mendes, ADM (GC-FIN)
Well, if it’s from the Bloomberg article they were referring to growth.
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Rhys Mendes, ADM (GC-FIN)
From the minutes, it’s -- you’re right, it’s not ---
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Rhys Mendes, ADM (GC-FIN)
It’s ambiguous.
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Rhys Mendes, ADM (GC-FIN)
Yeah. And as we were discussing earlier, inventory plays a key part in this, that the auto sector got hit first because it tends to operate with a just-in-time delivery model.
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Rhys Mendes, ADM (GC-FIN)
Other manufacturing sectors would have been hit subsequently as they started to draw down their inventories. You know, sectors like food and beverage that rely on perishable inputs that cross the border would have started to be more affected also. So I think that the -- the economic impact would spread the longer it lasted, and so the number wouldn’t be the same for each week, it would grow.
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Rhys Mendes, ADM (GC-FIN)
Less than it otherwise would have in the absence of the disruptions.
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Rhys Mendes, ADM (GC-FIN)
Yeah. So that is just saying that the change, the percentage change in GDP between the first quarter of 2022 and the fourth quarter of 2021 would be reduced by .1 to .2 percentage points.
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Rhys Mendes, ADM (GC-FIN)
Yeah. So again, we had a discussion earlier around, you know, a short disruption makes it feasible to catch up on that lost production subsequently, and so given -- you know, this email was February 22nd. By this point we knew the duration of the disruptions, in the event, you know, that they were limited in duration, and so at this point, we believed that it was possible for the lost production to be made up by subsequently, you know, people working overtime, factories running overtime. As I said earlier, that's not free because, you know, there's a reason you don't run your factory overtime in a day, just because you need downtime for maintenance, you need downtime for people to actually rest, and you know, running overtime can lead to productivity issues and stuff. But overall, we believed it was possible, given the limited time of the disruption.
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Rhys Mendes, ADM (GC-FIN)
It may not completely offset. There's -- you mean in terms of annual growth quarter to quarter? So basically what this means is that you'd see growth in the second quarter being a bit stronger than it otherwise would have as you see the catch-up in production.
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Rhys Mendes, ADM (GC-FIN)
I think we've ---
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Rhys Mendes, ADM (GC-FIN)
Yeah. I think we've covered the first point in terms of the length of the disruption is really what drives the ability of businesses to catch up in part. On the last bullet, I mean, I think that just speaks to the point Michael just made, that, you know, it was really the fact that the blockades had been ended within a limited time is what prevented the economic impact from escalating much further.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
Yeah, and I guess I would say that this sentence is in part trying to convey the longer term uncertainty.
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Rhys Mendes, ADM (GC-FIN)
But you know, the limited duration, the fact that the blockades were ended within a limited duration I think helped to avert some of the near term risks. You know, Michael talked about the negotiations with the U.S. over electric vehicles and... So that is clear that there was a helpful -- that it was helpful in the near term. What we don't know, is, you know, five years from now, when an automaker has to decide where to put their new plant, will this be a consideration. Hopefully the fact that the disruptions were relatively short-lived mitigates that issue, but that sentence was just a reminder that there is that longer term uncertainty.
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Rhys Mendes, ADM (GC-FIN)
Yeah. So the first column is the sum of trade at the Ambassador Bridge and at the points of entry at Emerson and Coutts that were blockaded. The second column is our estimate of the economic impacts, so the impact on GDP per day during the week where we think the impacts peaked, so that was I guess the week of February 6th or 7th when the -- the week during which the Ambassador Bridge was blocked. So that second column, the way we come up with that is we start -- we take as a starting point Transport Canada's scenario 1, which we discussed earlier, which estimated an impact from the Ambassador Bridge disruption at $45 million a day. We then make assumptions to get effects on -- you know, get estimates of the impacts stemming from the disruptions at the points of entry at Coutts and Emerson, and that gets us from the 45 to the $56 million a day. The 28 million reflects the -- you know, there was uncertainty about the overall impact. You know, we -- you saw in discussions earlier and in one of the emails I think you put up earlier there was a discussion around how should we think about the $45 million disruption that Transport Canada had? Should we think of it as an upper bound? So the 28 reflects that uncertainty. So we wanted to be cautious in terms of the economic impacts that we estimated. So it's simply half of the 56 million to reflect that there's a range of uncertainty about what the true impact is.
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Rhys Mendes, ADM (GC-FIN)
I remember a draft being sent to me. I don't remember the precise date.
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Rhys Mendes, ADM (GC-FIN)
I had asked for the reference to the GDP impact be removed, yes.
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Rhys Mendes, ADM (GC-FIN)
So a few reasons. One is that the -- you know, the -- we hadn't completed our GDP impact estimates ---
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Rhys Mendes, ADM (GC-FIN)
--- because in part we were still evaluating the situation. It was evolving.
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Rhys Mendes, ADM (GC-FIN)
I did not think that the -- as Michael discussed earlier, the per week characterization I thought missed the point that the GDP impact would rise with each subsequent week, it wouldn't be the same every week, the longer that the effects went on. And I think most importantly, the real issues here were the risk of a more prolonged or more widespread disruption to cross-border trade that would have led to a much larger GDP impact and the reputational risk that affected our reputation as a reliable trading partner and as a good destination for investment.
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Rhys Mendes, ADM (GC-FIN)
So I think this -- the last estimate we did of this was the .1 to .2 percent impact on the first quarter, quarter over quarter growth. And so we haven't revisited that. That said, I think that the -- it's fair to say that the economic impact was limited, but it was limited because the duration of the blockades was limited. So I think, again, it comes back to the fact that because the duration was limited, there was some ability to ramp up production after the blockades had ended and trade had resumed. Because the blockades weren't more widespread, as in affecting bridges that were being used to reroute some of the traffic that would have gone over the Ambassador Bridge in particular, that helped to limit the impact. But had the blockades been more widespread or longer lasting, the impact would have been much bigger. I would also just add that it's not possible to say that they didn't have any impact because we know that auto plants had either shut -- many auto plants had either shut down or reduced hours, reduced shifts, so there was clearly an impact in real time. That's -- that information is clear in the public record.
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Rhys Mendes, ADM (GC-FIN)
When we look at the data, so data collected, for instance, by Warren's, which is a company that collects data on the automotive industry among other things, if you compare their forecast for what February production would have been at the -- when they made the forecast at the beginning of February versus when it actually turned out to be, it ended up being close to 10 percent below what their initial forecast is. And I think it's reasonable to assume that at least part of that was due to the blockades, given that we know that there were shutdowns and reduced hours at many plants.
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Rhys Mendes, ADM (GC-FIN)
Yeah, so, I mean, you know, we often do assessments of things -- of events that are likely to have an economic impact in real time, because as I was mentioning earlier, we are trying to monitor the evolution of the economy. You know, we try to come up with an estimate for GDP in the current quarter and the next on an ongoing basis. So we're often doing real-time assessments, whether it's, you know, a flood or other weather event, or something like the blockades. We generally don't do ex post assessments of the impacts of events like this. The reason is, it's very difficult to actually identify the impact ex post. So, you know, you think about all of the February data that we're looking at, so whether it's the trade data, or GDP, or labour force data, there were confounding factors affecting things. So, you know, for instance, there was an Omicron wave in January of this year, which adversely affected -- which would have adversely affected economic activity, and therefore, would have affected the growth rate of economic activity between January and February, would have affected hours worked. And so there was also -- for instance, there were auto production issues in January unrelated to the blockades but related to shortages of semiconductors and other inputs, which caused auto production in January to be adversely affected. So, you know, there would be normally some ramp up in February to try to make up for that if the parts started to come in. That sort of confounds the ability to see the full effect of the blockades on auto production. So there were these various confounding factors that are always in play because there are always multiple things going on in the economy that make it difficult to provide an ex post estimate of the impact with any degree of confidence.
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Rhys Mendes, ADM (GC-FIN)
Precisely.
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Rhys Mendes, ADM (GC-FIN)
Thank you.
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Rhys Mendes, ADM (GC-FIN)
PCMLTF.
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Rhys Mendes, ADM (GC-FIN)
The acronym is too long.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
That is the estimate that Transport Canada had, yes.
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Rhys Mendes, ADM (GC-FIN)
We believed, yes, that the blockade did jeopardize our reputation. There were -- that was based on a number of public statements by officials in the US.
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Rhys Mendes, ADM (GC-FIN)
So we believed that the impacts would grow as time went on, as I explained this morning.
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Rhys Mendes, ADM (GC-FIN)
Yeah. And I mean, more generally, I think that the impacts would’ve spread over time.
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Rhys Mendes, ADM (GC-FIN)
Correct.
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Rhys Mendes, ADM (GC-FIN)
I’m not -- I’m not able to speak to the reason that the blockades were shorter or the manner in which they were cleared, but the date accords with my memory.
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Rhys Mendes, ADM (GC-FIN)
I think a more prolonged disruption at the Ambassador Bridge would have done greater damage to our reputation as a good place to invest, our reputation as a reliable trading partner.
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Rhys Mendes, ADM (GC-FIN)
Yes.
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Rhys Mendes, ADM (GC-FIN)
I have some passing awareness of that.
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Rhys Mendes, ADM (GC-FIN)
I believe that accords with my understanding of what I’ve read about that, but I don’t have any specific information on that.
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Rhys Mendes, ADM (GC-FIN)
Well, as we said in one of our documents, a renewed blockade would have contributed to escalating economic impacts. I can’t speak to whether or not the measures you’re describing were necessary or not.
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Rhys Mendes, ADM (GC-FIN)
No, we haven’t.
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Rhys Mendes, ADM (GC-FIN)
I haven’t given that a full enough consideration to give you a good answer, but I would -- I don’t disagree with the notion that there would be some impact.
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Rhys Mendes, ADM (GC-FIN)
That’s correct.
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Rhys Mendes, ADM (GC-FIN)
So we tried to implicitly take account of that, but it's not explicitly modelled, but it is -- we assume, basically, a similar amount of re-routing is what we were seeing at Ambassador.
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Rhys Mendes, ADM (GC-FIN)
Yeah. So we took what we were seeing at Ambassador Bridge and scaled it by the amount of trade crossing at Coutts, again, a rough estimate, but -- so it doesn’t specifically explicitly model the re-routing at Coutts.
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Rhys Mendes, ADM (GC-FIN)
Actually, yeah. There was evidence at the time that given that the semi-conductors had become scarce, there was a need to make choices about where and to which auto plants semi-conductors were being allocated. And my recollection is that they were disproportionately being allocated towards plants in the U.S., so it was affecting Canadian plants to a greater degree.
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Rhys Mendes, ADM (GC-FIN)
Can I just add that, you know, in a situation where the Ambassador Bridge became blocked again you'll note that the estimates that Transport Canada did were for peak impacts in the first week of a disruption. Given that inventories had been drawn down during the period of disruption, the return to a disruption at the bridge would have put us more into, like, a second week situation where, based on our own past experience and discussions with Transport Canada, you know, that could reasonably be up to, like, three-and-a-half times the size of the impacts that we were discussing for the first week.
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Rhys Mendes, ADM (GC-FIN)
Yeah.
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Rhys Mendes, ADM (GC-FIN)
Thank you.