Diamond definition won’t change: Bureau

A proposed change to the trade definition of Canadian diamonds, aimed at fostering a fledgling diamond cutting and polishing industry in the Northwest Territories, is dead in the water.

The document, circulated in the fall of 2002 to Liberal members of Parliament by the territorial government, lobbies for a revision of the Competition Bureau of Canada’s November 2001 guideline defining a “Canadian diamond” as one “mined in Canada,” to one “mined, cut and polished in Canada.”

The guideline was established after a public consultation process that began in 1999 and involved mining companies, cutting and polishing houses, jewelry retailers, consumers and regional governments.

After receiving the recent proposal from the government of the Northwest Territories (GNWT), the Competition Bureau revisited the issue and hired a specialist in international trade law with a firm in Toronto.

“We concluded we did not have sufficient grounds to alter our position, so we advised the GNWT accordingly last fall,” says Marie-France Gauvreau, an officer with the Competition Bureau. “We also invited the GNWT to come to us if they have some new information.”

She adds: “We were advised by the expert in trade law that the position advocated by the GNWT would be interpreted as being unduly restrictive, to favour domestic industry. We were also advised that the position we have now is consistent with all the regional trade agreements negotiated by Canada [under the North American Free Trade Agreement].”

The Competition Bureau is an arm’s-length consumer advocacy body that ensures the marketplace offers Canadians numerous choices and adequate competition. Its guidelines are not legally binding but are usually consistent with international trade agreements.

International trade law defines a diamond’s “country of origin” either as the country where it is mined, or the one where it is cut and polished. For example, Mexico has a trade agreement with the European Union that defines the country of origin of a diamond only as where it is cut and polished, and does not take into consideration where it is mined; yet under NAFTA, Mexico maintains the opposite position. Proposed World Trade Organization agreements define the country of origin simply as the one where a diamond is cut and polished.

At this time, there is no international trade agreement that uses the definition “mined, cut and polished” to determine a diamond’s country of origin. Critics of the Competition Bureau say its definition makes no sense.

“If you take the soapstone out of the ground in Canada and send it to France and someone in France carves it, is it a soapstone carving from Canada? No. It’s not considered that,” says Martin Irving, the territorial government’s director of diamond projects. “If there is a marketplace-driven demand for Canadian diamonds in the long term, then that will create a drive for cutting and polishing in Canada under our definition.”

Canadian diamonds command premium prices because some consumers are willing to pay extra for diamonds they know were not mined in African countries where diamonds may have financed political or tribal violence. Those premium prices are a potential windfall for the territorial economy, particularly if, in the territorial government’s view, “Canadian” diamonds are cut and polished in the territories.

The government also sees taxation revenue slipping through its fingers. “The royalties and the vast majority of the [tax] revenue associated with the mining goes to Ottawa,” says Irving. “The question is, how do we make sure we get as much benefit as possible out of the diamonds that are coming out of our ground? One of the ways to do that is through additional job creation in value-added [industries].”

Canadian diamonds will make up about 10% of the world’s diamonds by value within a year, and roughly 10-15% of Canadian diamonds are cut and polished at facilities in the Northwest Territories, Vancouver and Montreal.

“The companies that are adding value or cutting and polishing the product, and that are getting a premium when they sell it, based on the Canadian name and Canada’s international reputation, are not Canadian,” says Irving. “These companies are based in Vietnam, in China or India or wherever. The signal that’s sent is of Canadians as hewers of wood and drawers of water — exporters of raw material.”

The Competition Bureau says most of the money in diamonds comes from mining, not from cutting and polishing.

“Most of the value of the diamond, once it was polished, was realized at the point of extraction,” says Gauvreau. “And we have conclusive numbers on that.”

BHP Billiton, owner of 80% of Ekati, Canada’s first diamond mine, told The Globe and Mail that it supports the Competition Bureau’s definition. At nearby Diavik, owned 60% by London-based Rio Tinto and 40% by Toronto-based Aber, most of the diamonds mined will be lower-quality gems, thus making it better business sense to take cutting and polishing overseas.

“Most [lower-quality diamonds] cannot be polished economically in Canada,” says Pierre Leblanc, Diavik’s vice-president of corporate affairs. “The diamond industry is one that has legs. The diamonds, once they are extracted out of the ground, will generally migrate to the lowest-cost [cutting and polishing] centre. That means the small diamonds will be cut in places like China, India and Sri Lanka.”

Ekati and Diavik sell their diamonds directly to third parties that fashion them into fine jewelry.

Leblanc estimates that the average cutter and polisher in Canada makes $18 per hour, whereas the same position in a Third World country would command 25 per hour.