COVER

Free Trade: A Historic Midnight Deal

PAUL GESSELL October 12 1987
COVER

Free Trade: A Historic Midnight Deal

PAUL GESSELL October 12 1987

Free Trade: A Historic Midnight Deal

COVER

The critical telephone call to Camp David reached President Ronald Reagan at 11:40 p.m., 20 minutes before the Saturday midnight deadline. Treasury Secretary James Baker told Reagan that U.S. and Canadian negotiators had agreed on the outline of a historic free trade pact. He urged the President to dispatch a letter to Congress before the Oct. 3 deadline expired for a “fast track” consideration of the matter. At six minutes to midnight, White House messengers delivered sealed envelopes to clerks of the Senate and the House of Representatives. Inside were identical memoranda signed by Reagan instructing Congress of the administration’s intention to enter a free trade arrangement with Canada. Then, shortly after midnight, International Trade Minister Pat Carney emerged in the chill of a Washington parking lot to confirm that the agreement had been reached—after an intense weekend of eyeball-to-eyeball talks. Declared Carney: “It is an historic agreement, it is balanced and it benefits all Canadians in all regions.” Indeed, the accord clears the way for nothing less than the eventual dismantling of the commercial border between the world’s two largest trading partners. The deal is still only an agreement-in-principle, unsigned and uninitialled by either side. But it included major concessions by both sides. Among them:

• Creation of a binational panel to arbitrate trade disputes after all existing measures now used by the two countries had been exhausted. The panel would operate as a court of last resort;

• Changes governing the CanadaU.S. auto industry that will, according to chief trade negotiator Simon Reisman, add more jobs and production in Canada;

• Less screening of American investment in Canada and a raising of the ceiling on takeovers scrutinized by Ottawa above its current $5-million level;

• a 10-year adjustment period for phasing out tariffs.

According to one participant, the agreement does not give Ottawa all that it wanted in one key area: improved access to the estimated $500 billion in U.S. government procurement. In addition, Canada has agreed to make minor changes in Bill C-58, which regulates content—and provides tax incentives to advertisers—in Canadian publications and on television and

radio. The deal also gives U.S. wine makers better access to the Canadian market, but leaves the Canadian beer industry—a potential victim of a free trade pact—untouched.

But for Canada, the main feature may be the American agreement to a binding settlement for trade disputes, which could protect Canadian exporters from the effects of U.S. countervailing duties and antidumping penalties. Said Carney: “It is the first time

the United States has ever entered into such a mechanism. It’s binding. We’re pretty pleased with it.”

The outline of the accord—negotiators planned to spend up to two weeks drafting the final text —was not reached until the final hours of discussions. One participant called it a cliffhanger, with the two teams nearly giving up in despair at critical points in the 14-hour day. The actual negotiating involved Baker, Trade Representative Clayton Yeutter and chief trade negotiator Peter Murphy on the American side; Carney, Reisman, Finance Minister Michael Wilson and Derek Burney, the Prime Minister’s chief of staff, on the Canadian side. The central players were Baker, because of his political clout within the administration, and Burney, whom one participant called “the quarterback” of the Canadian team.

Milling outside in hallways and adjacent offices, various working groups were called in for periodic consultations. The ministers did most of their work on two sofas facing a coffee table in Baker’s office on the southwest corner of the Treasury building. Sometimes they gathered around Baker’s desk in a tight circle to review documents. Said one member of the U.S. team: “The whole mood would rise and fall with each development. No one knew what was going to happen literally up until the last moment.”

In Ottawa, Prime Minister Brian Mulroney was in the Meech Room of

the Langevin Building, in regular touch with the Canadian team. At 8 p.m. the mood was gloomy. But the outlook changed after the U.S. team returned from a private session that began at 10:30 p.m. It was after 11 p.m. when Burney called Mulroney for the last time to notify him that agreement had been reached. Hanging up the telephone, Mulroney turned to his cabinet ministers and declared: “Gentlemen, that’s it. We have ourselves a deal.” A few minutes later he told a group of assembled officials that they had made a contribution to Canadian history. “A hundred years from now,” he said, “what will be remembered was that it was done. And the naysayers will long have been forgotten.”

Meanwhile, President Reagan was briefed by telephone at his Camp David, Md., retreat, from which he dispatched messengers to Capitol Hill with the required written notices.

From his office, Mulroney began telephoning the premiers at 1 a.m. Sunday to brief them; 20 minutes later he met reporters in the foyer. Declared a smiling Mulroney: “We think it’s good for Canada.” Asked about the Auto Pact, which guarantees Canada its fair share of North American car production, the Prime Minister added, “If you wait and see the agreement, you’ll be satisfied that any changes made anywhere are consistent with the objectives that we set out.” Those objectives included retention of the Auto Pact, Canadian cultural policies and regional subsidies. Mulroney, who has long maintained that his “political neck” was on the line in the trade talks, appeared pleased with the agreement-in-principle. He told reporters: “I’m feeling a little better about my neck right now.”

The U.S. side appeared equally upbeat. Said Trade Representative Yeutter: “It’s been a productive day, after a long, hard and challenging endeavor. We’re feeling very positive.” Added Murphy, Reisman’s American counterpart as chief negotiator: “God only knows what we did, but I think we did something. It looks like we have a deal.” There was, Murphy said, “too much economic sense in the whole thing” to let the talks collapse in failure.

It was Baker’s dramatic 15-minute telephone call to Burney on Thursday, Oct. 1, at 9:40 p.m., interrupting a meeting with five dispirited cabinet ministers in the Langevin Block, that set the stage for the agreement. In the call, Baker addressed the most contentious issue between the two countries: formation of an independent tribunal to settle trade disputes. His offer, although not meeting all Canada’s conditions, was attractive enough to per-

suade Mulroney to dispatch a highlevel negotiating team to Washington the next morning to resume the talks. Said one participant in the Thursday night meeting: “The call did make a significant difference to the whole climate.”

Still, Congress must now approve the deal, and—confronted with record U.S. trade deficits—the membership is

in a highly protectionist mood. There are also potential obstacles in Canada. The provincial premiers have the right to reject areas of the agreement that affect their own, but not federal, jurisdiction.

In fact, the trade deal could resurrect the Prime Minister’s political fortunes. It advances one of the three principal planks in the government’s platform—the other two are tax reform and a constitutional arrangement acceptable to Quebec. And it demonstrates that Mulroney’s strategy of cultivating friendship with Reagan— often criticized^ by the opposition parties—had paid a substantial dividend. Still, the Prime Minister must now sell the merits of the deal to Canadians, whose support for free trade has fallen rapidly over the past six months, according to public opinion polls.

For Reagan, an avowed free trader, the deal could mean that he will be seen around the world as practising what he has preached for so long: the dismantling of barriers to trade in all categories. But reaching a deal is only the first step. Reagan will have to expend much of what remains of his political capital shepherding the deal through a reluctant Congress.

The announcement concluded one of the most hectic weeks of negotiations ever between Canada and the United States on any issue. The week was characterized by countless late-night telephone calls between the two capitals, three trips to Washington by Wilson and Carney to confer with top officials of the Reagan administration, and a hastily arranged three-hour meeting between Mulroney and the provincial premiers in Ottawa.

The stage was set for a political make-or-break solution on Sept. 23, when Canada’s Reisman abruptly walked out of the negotiations in Washington. The biggest stumbling block was Canada’s insistence that any trade deal provide for creation of a binding mechanism to settle trade disputes. However, Canadian officials close to the talks said that no single issue caused them to break down. Rather, they said that Reisman suspended negotiations because of a growing realization that the gap between the two sides was widening as the negotiations entered their final two weeks. The talks, said one official, “were not converging, they were diverging” from Canada’s fundamental demands.

But as ministers and officials scrambled to save the talks—the Conservative government’s most important economic initiative —members of the opposition parties in Ottawa sounded an alarm. They said that Mulroney might be tempted to make concessions

to the Americans in order to obtain a last-minute deal. In the House of Commons, NDP Leader Ed Broadbent voiced fears that regional development, cultural industries and the Canadian auto industry might suffer. Added Broadbent: “Such a deal at this point could only be reached in desperation and could only be bad for the future of Canada.”

Meanwhile, behind the scenes, Burney had opened communication lines with the White House in a series of telephone conversations with Baker, the powerful Texan who emerged as the key official on the American side in the trade issue. Those talks initially inspired little hope among the Canadians.

While the Americans moved slightly on the dispute settlement issue, they demanded in return that Canada put its sensitive cultural, regional and investment policies back on the table. But at a meeting on Sunday,

Sept. 27, in Washington involving Baker, Wilson and Canadian Ambassador Allan Gotlieb, Canada agreed to try to break the deadlock through high-level political talks the next day.

The Monday meeting—in a small conference room in the Treasury building—lasted llA hours. Carney, Wilson, Baker and Yeutter tried to find ways to resolve their differences while lower-ranking trade officials from both countries hovered in nearby rooms. According to several senators later briefed by Yeutter, the Canadians asked for a so-called “safe harbor” provision in any dispute settlement mechanism. Under that plan, both countries would agree that some subsidies and government programs would be excluded from trade complaints. But the meeting ended inconclusively, and Wilson and Carney flew home, dejected, to confer with the cabinet.

The ministers met sporadically all day in Ottawa, stymied as to how next to respond to the Americans. Yeutter had been so confident of a Canadian response by that afternoon that his office even printed three different press releases—to react to whatever announcement was made in Ottawa. By 7:45 p.m. Yeutter gave up and went home for dinner.

But less than an hour later the telephone wires between Washington and Ottawa were humming as Burney spoke to Baker and Carney to Yeutter. A Canadian response was sent to Washington overnight,

outlining Ottawa’s latest proposals.

But by then the Americans appeared annoyed by Canada’s negotiating tactics. Yeutter complained to reporters that it was time to stop haggling over the telephone —and to resume face-to-face talks. But the Canadians were in no hurry. Mulroney and his ministers closeted themselves in cabinet meetings for most of Wednesday, planning strategy. Finally, at 11:45 p.m., Gotlieb telephoned Baker at his home, waking him and requesting another highlevel political meeting on Thursday. According to a Reagan administration official, an embarrassed Gotlieb had to acknowledge that he did not even know who Ottawa planned to send to Washington.

In the end, Carney, Wilson and Burney flew back to Washington Thursday morning for what turned out to be only a 2Vi»-hour meeting with their U.S. counterparts. Before boarding a government Challenger jet to the U.S. capital, the three Canadians met with Mulroney in the VIP lounge at Ottawa’s airport. The prognosis for the free trade talks was bleak. “Nobody ever said it’s final,” said one government official, “but they did say it’s in trouble and they

didn’t seem to be getting anywhere.” The low spirits on the Canadian side were evident to American officials. An administration official told Maclean's that Wilson and Carney explained that they could not sell the deal that the

Americans were proposing in Canada—but they were also afraid of the political repercussions if the talks failed. Said the official: “It was a sincere admission that they were lost in a political thicket and they didn’t know which way to go.” American officials left the meeting believing that free trade was dead.

Before Saturday’s agreement-inprinciple, pessimistic views also abounded on Capitol Hill. The most vocal critics were members of the Senate finance committee, which must review any pact between Canada and the United States. After a 90-minute briefing with American administration officials, some senators said that they doubted that any deal could be worked out before the weekend deadline. Said Pennsylvania Republican Senator John Heinz: “It’s somewhat remote.”

At the same time, President Reagan was receiving conflicting advice on one key point. Some American officials wanted Reagan to endorse a five-year general framework agreement setting out the basic principles of a free trade pact. Details of the accord would be negotiated during the following month. Others opposed that approach. Those favoring it said that any eventual failure in the negotiations could be

blamed on Canada, because its negotiators walked away from the talks. However, Reagan’s personal aides opposed that way of reaching a deal.

An administration official said in an interview that a memo was presented to Reagan on Thursday warning him against adopting the framework plan. The official said that if Canada and the United States were successful in fleshing the framework out, the domestic political benefits for Reagan would be minimal. But failure could pose severe problems for the Republican president. Many members of the Democrat-controlled Congress, which is preparing to adopt sweeping new protectionist trade legislation, would charge that Reagan’s failure is reason to reduce his powers to negotiate on trade matters.

Despite the cloud of despair in both capitals, Burney and Baker continued telephone discussions on Thursday. Their talks culminated in Baker’s crucial late-night call. Officials close to the talks speculated that the fact that Baker, one of Reagan’s most senior cabinet members, made a personal effort swayed the balance even more than the substance of his discussions. Said an American administration official: “Mr. Baker doesn’t like his name associated with failures.”

As a result, Wilson, Carney, Burney and Reisman returned to Washington yet again on Friday and began the final push toward a deal. Simultaneously in Ottawa, Mulroney briefed seven of the 10 premiers for three hours on the state of negotiations. (Three premiers—Manitoba’s Howard Pawley, Newfoundland’s Brian Peckford and New Brunswick’s Richard Hatfield— were unable to attend the hastily arranged meeting.) The premiers left the meeting at the Langevin Block, which houses the Prime Minister’s Office, saying that there was still considerable work to be done before a deal could be reached. But pulling Reisman out of the talks the previous week, said Saskatchewan’s Grant Devine, caused the Americans “to wake up” and produce new proposals.

The full story of the final negotiations—27 hours of talks Friday and Saturday—would emerge in the days ahead. For now, both sides basked in the glow of their achievement, reaching a goal that eluded Canadians and Americans for more than a century. And both sides recognized that with the agreement mapped out, the real debate on the historic pact was about to begin.

PAUL GESSELL

HILARY MACKENZIE

MADELAINE DROHAN

IAN AUSTEN

MARCI McDONALD