COVER

DISAPPOINTMENT AND DELIGHT

D’ARCY JENISH October 19 1987
COVER

DISAPPOINTMENT AND DELIGHT

D’ARCY JENISH October 19 1987

DISAPPOINTMENT AND DELIGHT

COVER

Peter Nygard, a Torontobased manufacturer of women's sportswear, was angry and bitterly disappointed.

From the beginning, he had enthusiastically supported the Mulroney government ’s free trade negotiations with the United States. But when he saw the draft agreement last week, Nygard concluded that the Canadian clothing industry would be a big loser. On the final day of negotiations, he said, the Canadian trade team agreed to a United States demand that only garments made exclusively from North American fabrics be permitted to cross the border tarifffree. Canadian manufacturers, he noted, import about 1+0 per cent of their fabrics from outside of North America. “It was a deal buster and the government agreed to it,” said Nygard. “It takes the fashion industry out of the deal. "

Gordon Cummings, president of Halifax-based National Sea Products Ltd., was in a buoyant, upbeat mood. Over the past seven years National Sea, Canada 's largest fishing company, has, along with others in Canada's Atlantic fishery, faced five countervailing duty actions launched by competitors in the United States. In the past year alone, the company has spent $1.5 million defending itself against countervail actions. But Cummings said that the creation of a binational trade disputes panel, a central element of the Canada-U.S. free trade agreement, would sharply reduce the harassment of his company.

“This is a straight win situation for us, ” Cummings told Maclean’s. Indeed, the optimistic executive predicted that National Sea, which now employs about 8,000 people, will expand its workforce by 1+00 as exports to the U.S. increase over the next five years.

Across the country last week, the reaction from the business community to the draft trade pact ran a passionate

gamut from Nygard’s disappointment to Cummings’s delight. The agreement, reached after frantic last-minute negotiations on Saturday, Oct. 3, inevitably will produce winners and losers. But last

week none of them were prepared to gaze five or 10 years into the future to give any precise prediction of their long-term prospects under free trade. For one thing, the details of the agreement were unavailable—a 35-page “preliminary transcript” released by Ottawa merely contains general principles rather than detailed rules. In some cases, the agreement devotes a single sentence to entire industries and billions of dollars worth of exports. Besides, executives pointed out that their companies or industries would be affected by many other events besides free trade, making it difficult to isolate possible effects of the agreement.

Savings: Still, on a broader scale dozens of leading business executives stated flatly that the agreement spelled disaster for their industries. And others welcomed the guaranteed access to the United States market. Among the potential losers were Canadian grape growers and wine makers, the music recording industry, food processors, chicken and egg producers and western grain growers. Probable winners included the oil and gas industry, petrochemical producers, the brewing industry, cattle and hog producers, shoe manufacturers and furniture makers. The Quebec business community was particularly strong in its support for the agreement, and the Consumers’ Association of Canada predicted that tariff reductions would result in big savings for average shoppers.

Hurt: Stranded between the obvious winners and losers were those who must await the detailed regulations. Victor Lonmo, president of the Automotive Parts Manufacturers’ Association of Canada (APMA), said that, based on u available information, Ö changes in regulations gov| erning automotive trade

0 would hurt the parts indus-

1 try. But he said that the absence of detailed regulations

made it impossible to assess the impact. Likewise, the Canadian Bankers’ Association argued that American banks won greater access to the Canadian market without making similar concessions. However, the association refused to speculate on the effects.

Victim: By the end of last week the most visible victim of the deal was the Canadian wine industry. According to Jan Westcott, executive director of the Toronto-based Canadian Wine Institute, wineries are currently shielded from American competition by tariffs that run as high as 65 per cent of the retail price in Ontario and 127 per cent in Quebec. Over seven years, those tariffs will be eliminated, but fully half the protection will be removed in the first two years. Revenues are currently $250 million a year, and the industry employs 10,000 full-time workers in vineyards and wineries across Canada, mainly in Ontario, Quebec and British Columbia. David Diston, a vice-president of T.G. Bright & Co., Ltd. in Niagara Falls, Ont., said that the deal will wipe out the Ontario grape-growing industry. “The wineries which survive will in effect be blenders and bottlers,” said Diston. Indeed, investors quickly revealed their anxieties. On Wednesday, four days after the agreement was reached, A shares in Winona, Ont.-based Andrés Wines Ltd. fell $2.50, or 19 per cent, on the Toronto Stock Exchange and hit a one-year low of $13.

Tariffs: The removal of tariffs could also devastate the Canadian recording industry, which generates revenues of more than $1 billion annually and employs 15,000 people in producing, manufacturing, marketing and retailing.

Canadians purchased 70 million records last year worth more than $640 million. More than 90 per cent of those records were produced in Canada because the manufacturing side of the industry is protected by tariffs of 13.7 per cent on records and 11.3 per cent for tapes. Brian Robertson, president of the Canadian Recording Industry Association, said that removing the tariffs could lead to the

transfer of the manufacturing business back to U.S. parent companies.

In the agricultural sector, Canadian trade negotiators managed to preserve provincial and national marketing boards, which control supplies and prices of dozens of other agricultural products. But they agreed to higher import quotas for chickens and eggs, which will likely mean stiffer competition for Canadian producers, said Gilbert Shouldice, general manager of the Canadian Egg Marketing Agency. At the same time, Canada and the U.S. have agreed to eliminate all tariffs on agricultural products within 10 years.

Under that scenario, Canadian food processors are self-styled losers. George

Fleischmann, president of the Grocery Products Manufacturers of Canada (GPMC), said that his members will be forced to continue to buy chickens and eggs from marketing boards at artificially high prices. On the other hand, American food processors who can use lower-priced raw materials will be able to ship into Canada duty-free. “There are some very serious implications if they remove the tariffs,” said Montgomery Ward, vice-president of Elmira Poultry Inc., a poultry processor 80 km west of Toronto.

Wild: Analysts indicate that Western Canadian grain growers stand to lose up to $150 million in revenue annually due to the elimination of the two-

price system for domestic wheat. Since 1967 the Winnipeg-based Canadian Wheat Board (CWB) has protected both producers and consumers from wild swings in world prices by setting upper and lower limits on domestic prices. Currently, the international price of wheat is about $3 per bushel but the domestic price is pegged at about $7 per bushel, the CWB floor price. The difference between the world and domestic prices is worth about $150 million annually to grain growers, said Douglas Brunton, spokesman for the 60,000member Alberta Wheat Pool.

But while wheat farmers lose, consumers should benefit from lower bread prices, said Robert Bonus, senior vicepresident of Corporate Foods Ltd. in Etobicoke, Ont. He also argued that Canadian bakers will be able to compete equitably against American firms who buy their domestic wheat at world prices. Moreover, bakers in the B.C. Lower Mainland have lost approximately 20 per cent of their domestic market to U.S. bakers partly because of the two-price system, said Hugo Powell, president and chief executive officer of Vancouver-based McGavin Foods Ltd.

Auto: But perhaps the biggest potential loser under the newly negotiated agreement is the auto parts industry, APMA’S Lonmo said that since the Canada-U.S.

Auto Pact was signed in 1965,

U.S. vehicle manufacturers have had to make sure that 60 per cent of the parts or labor is Canadian in order to ship cars to Canada duty-free. The new provisions would allow cars to enter the country duty-free provided they contain 50 per cent North American parts and labor. “You could have 100 per cent North American value added and zero Canadian value added,” said Lonmo. As a result, parts manufacturers desperately want safeguards in the new trade regulations. And the agreement would also allow citizens on either side of the border to buy a used car in the other country and bring it home duty-free.

Without some performance requirements, Canada, and Ontario in particular, has a lot to lose, warned Lonmo. APMA’S 350 members employed 68,000 workers and recorded total sales of $12.4 billion last year. More than 80 per cent of the industry is based in Ontario, with 10 per cent located in Quebec and the balance scattered across the country.

While any perceived threat to the auto industry was bound to give Ontario the jitters, the Quebec business community had few if any reservations about the pact. “Quebec rejected narrow pro-

vincialism in the 1980 referendum,” said David Culver, president and chairman of Montreal-based multinational Alcan Aluminium Ltd. “Having turned that corner, we Quebecers are now finding Canada just a bit too small.” Similarly, Montreal consultant André Sormany said that Quebecers do not share Ontario’s fears of cultural assimilation. “Quebecers always need a mission, and now that mission is business,” said Sormany.

Block: But Quebec stands to benefit greatly from the trade deal’s proposed continental energy market. It opens the door for huge hydroelectricity sales to the northeastern United States and possibly a second multibillion-dollar James Bay power project, Quebec Energy Minister John Ciaccia told Maclean ’s. At the same time, said Ciaccia, the agreement will discourage U.S. coal producers from launching countervail actions against

Quebec, and will reduce the National Energy Board’s authority to block export sales.

In Western Canada, the oil and gas executives, petrochemical producers and livestock producers all enthusiastically endorsed the deal because it gives them secure access to the U.S. market. But William Gatenby, president of Calgary-based Texaco Canada Resources, said that the deal really does not introduce dramatic new policies for many of the industries. Since the Conservatives took office, they have dismantled the Liberals’ National Energy Program (NEP), deregulated oil and natural gas prices and eased the regulations on exports, said Gatenby. For petrochemical producers, the elimination of U.S. tariffs ranging from 10 per cent to 18 per cent will mean improved returns and

possibly new investment, said John Feick, president of Calgary-based Novacor Chemicals Ltd.

Although economic nationalists were outraged over the new rules on screening U.S. investment, pro-free-traders argued that they do not sacrifice the country’s interests. Upon implementing the agreement, Canada can review any direct takeover of a domestic company worth more than $25 million. Within four years the review threshold rises to $150 million. According to the latest figures available from Statistics Canada, there were 945 companies in Canada with assets exceeding $150 million in 1984 and they controlled 70 per cent of all corporate assets. University of Toronto economist John Crispo said that those figures demonstrate that the federal government can still control the ownership of the country’s most important assets.

For consumers, the free trade deal will be a windfall, said Sally Hall, president of the Consumers’ Association of Canada. The elimination of all tariffs within 10 years of implementing a deal will result in cheaper manufactured goods because duties are always added to the retail price. According to federal department of finance figures, Canada levied duties of $2.1 billion in 1986 on the $20.7 billion worth of dutiable U.S. imports. “We will see a greater variety of goods and cheaper prices,” said Hall. And that may help take the sting out of a deal that is bound to cost some Canadians their jobs and some owners their companies.

D’ARCY JENISH

JOHN HOWSE

TOM FENNELL

RICHARD KELLY HEFT

NICHOLAS JENNINGS

BRUCE WALLACE