COVER

TRADE SQUALLS DEAD AHEAD

CHRIS WOOD October 5 1987
COVER

TRADE SQUALLS DEAD AHEAD

CHRIS WOOD October 5 1987

TRADE SQUALLS DEAD AHEAD

COVER

The report that Canadian negotiator Simon Reisman had broken off talks aimed at achieving a free trade deal with the United States struck Canada’s largest fishing company with the suddenness of a Grand Banks squall. Early last week, before free trade talks broke down, Halifax-based National Sea Products Ltd. president Gordon Cummings had an ambitious plan to expand. The company would make a $20-million investment in a plant that would create 400 new jobs in Lunenburg, N.S., making frozen dinners for export to the United States. Later, with the talks at least suspended, that sunny prospect abruptly clouded. Cummings said that he expects his industry will have to fight American duties once again, as it did in a 1984 tariff battle over filleted fresh fish. And without an agreement, the 400 jobs will likely go to New Hampshire. Cummings declared, “We’ll still make the investments—but we would make them in the United States.” As Canadian business adjusted to the possibility that the free trade initiative might fail, National Sea’s reaction was echoed across the country.

There were a few sighs of relief as well, particularly in such industrial sectors as brewing, where executives had said that they were concerned about open American competition.

But most observers expressed alarm, anticipating a wave of American protectionism aimed at Canada’s $16-billion surplus on the nation’s $165-billion two-way trade with the United States. At best, Canadian executives and economists told Maclean’s that the economic future for Canada is uncertain.

At worst, some said that they foresaw a decade of decline.

For their part, federal officials disclosed the outline of Ottawa’s fallback agenda on trade: the new strategy would focus more specifically on securing freer international trading rules through renegotiation of the General Agreement on

Tariffs and Trade (GATT), the 92-nation agreement that sets the general rules for trade in the noncommunist world.

Cost: As one executive after another voiced concern for the future, a consensus emerged about an additional threat to Canada’s prosperity—the loss of jobs to the United States. Without export access to the U.S. market secured by a trade deal, many business leaders said that they would be forced to locate new plants inside the American trade fortress—sidestepping protectionism, but at a high price in lost jobs for Canadians. There were few actual estimates of the ultimate cost of a failure in the trade talks. “Nobody can put numbers on it,” said University of Toronto economist John Crispo. “But the potential consequences are devastating, socially, economically and politically.” Added Crispo: “Ontario gets hit harder than anybody.”

There was a strong belief—widespread among observers on both sides

of the border—that a complete breakdown of the trade talks could trigger a succession of American trade actions against Canada. In Michigan, where many Canadian-made automobile parts are sold, Marc Santucci, a trade adviser to Gov. James Blanchard, warned bluntly last week, “We’ll see a period of bad feeling.” Added Santucci: “You’ll see a lot of disputes, which the U.S. government asked us to hold off on, being moved up and acted on.”

One irritant that could turn into an early flash point is Canada’s $5.2-billion surplus in automotive trade with the United States. Much of that trade is regulated by the 22year-old Canada-U.S. Auto Pact. American negotiators caused a stir earlier this month when they indicated that they intended to put automotive issues on the free trade agenda. However, Canadian negotiator Simon Reisman said that he and his U.S. counterpart, Peter Murphy, had not discussed it before Reisman broke off negotiations last week. But some American politicians’ complaints are not solely confined to the pact. A major irritant is the Canadian program that allows Asian automakers to earn remissions of duties paid on cars entering Canada if they buy or produce auto parts in the country. In August seven auto-producing states urged Washington to exercise its right to reopen the Auto Pact on twelve months’ notice, in order to deal with that and other issues. Now, noted Michigan’s Santucci, “momentum has been created to do something. If we don’t do it within the free trade talks, we’ll do it outside.”

Surge: Other Canadian industries are also bracing for a surge in American protectionism. Among the potential targets: Canadian lumber, printing, wine, aluminum and pharmaceuticals. In each case, U.S. competitors are expected to contend that Canadian firms enjoy either protected markets or hidden export subsidies. And even when such complaints fail, the harassment effect on exporters can be substantial: in 1984 the Canadian fishing industry spent $1.5 million to fend off American attempts to impose a countervailing duty on imported Canadian fish.

Such allegations may soon be given vastly more support from U.S. trade legislation, a key feature of which are

countervailing duties that could be levied on imports from other lands. A 958-page bill now before the House of Representatives and a 1,033-page Senate version—the two are now being amalgamated by a joint committee of the two chambers into one omnibus bill—contain dozens of far-reaching provisions. Several clauses could reduce Canadian steel exports to the United States by 25 per cent, costing producers up to $400 million annually. Another would require automatic retaliation against countries that carry large trade surpluses with the United States, as does Canada.

‘Serious’: But still more dangerous for Canada is a provision included in both current versions of the proposed U.S. trade law, designed to expand the American definition of unfair subsidies. The new definition would include any

“advantage . . . that would not exist but for government action.” That allinclusive wording, charged Murray Smith, director of international economics at the Montreal-based Institute for Research on Public Policy, could allow U.S. industry to cite almost any Canadian government program as

grounds for countervailing duties. “If it becomes law,” Smith said, “the consequences for Canada are serious.”

It was in order to restrain such excesses of protectionist zeal that the Conservative government first entered into free trade negotiations in May, 1985. But with the talks apparently on the verge of collapse last week, Canadian business leaders were forced to reconsider their strategies in a new light. Many shared the conclusion of National Sea’s Cummings: if Canadian exporters fail to win access to the U.S. market at the free trade table, they will be forced to seek that access by setting up shop on American soil.

Pressure: Some executives say that they are already confronting that decision. Klaus Baumgartner, owner of Bedford, N.S.-based K.B. Electronics Ltd., for one, said that he is reconsidering plans to more than double employment at his plant, where 100 people make power supply equipment for weapons systems. Without a trade deal, he says, one-third of the 150 new jobs he expects to create could be located in the United States. Said Baumgartner: “It means transferring jobs, transferring technology, that we normally would have kept here.” For his part, Donald Belch, senior manager of trade relations for Toronto-based Stelco Inc., expressed a similar opinion. Noting that Canadian steelmakers rely on U.S. customers for onequarter of their sales, Belch predicted that the failure of free trade would put pressure on management to invest in U.S.-based mills “under the curtain” of protectionism.

For a handful of industries, there was a silver lining in the free trade talks—and in the Reisman walkout. Brewers, who said that they would suffer heavy losses under a free trade accord, were

“not upset” at the suspension of the talks, said Edward Stewart, executive vice-president of Toronto, Ont.-based Labatt Breweries of Canada. At the same time, Stewart added that a thorough review of the company’s operations—initiated in anticipation of a trade agreement-had turned up opportunities for improved efficiency.

At Inniskillin Wines Inc. of Niagara-on-the-Lake, Ont., meanwhile, there was a realization that without a trade deal the company would not have to compete with a flood of cheap Californian wine. At the same time, the company made plans to begin selling Canadian Chardonnay wine to U.S. consumers in December if a trade deal were signed. Declared co-owner Donald Ziraldo: “It took free trade to scare the hell out of us and get us moving.”

Banned: Meanwhile, Canada’s chartered banks can expect “business as usual” if there is a permanent breakdown of the talks, predicted Edward Neufeld, executive vice-president of economics and government affairs for the Royal Bank of Canada. Neufeld noted that the banks had pressed Canada’s trade negotiators for the right to enter the securities business in the United States—a business that banks may legally enter in Canada, but from which they are banned under U.S. law. He added that he expected Canada to continue to seek American concessions on the point.

Still, the collapse of the talks left Canadian officials searching last week for other options.

They ranged from a new focus on trade with nations of the the Pacific Rim, to the government-supported development of key industries. But all the choices—including the government’s preferred option of seeking more liberal trade rules under the terms of GATT—appeared to contain drawbacks.

Glut: In the West, Colin Hansen, vice-president of the Vancouver-based Asia Pacific Foundation of Canada, argued for the further development of new markets in the Pacific Rim countries. Hansen urged Ottawa to move ahead on a plan to name Vancouver an international banking centre—a designation that Hansen said would enhance Canada’s trading position in the Pacific. But cultural differences

have made Asian markets difficult to develop, and escalating energy costs, a glut in commodity markets and increasing debt loads have caused several countries—among them the Philippines, Malaysia and Singapore—to lose

much of the economic vigor that they enjoyed in the early 1980s.

Meanwhile, Carl Beigie, chief economist for Dominion Securities Inc., suggested a plan verging on isolationism. According to Beigie, Canada should consider withdrawing from some of its

obligations under GATT for as long as two decades, to concentrate instead on developing a handful of industries that could eventually become internationally competitive. But Beigie acknowleged that his proposal would entail massive government intervention in the economy—and drastic reductions in the goods available to Canadian consumers.

Disarray: Trade and finance officials in Ottawa, however, made it clear last week that the second string to Canada’s trading strategy is tied firmly to expanding, not contracting, trade with the rest of the world. With free trade in disarray, the emphasis will be on GATT. The member nations agreed last year to launch a new round of negotiations aimed at checking the growth of protectionism, strengthening GATT’S dispute-settling mechanisms and reducing the billions that the world’s major exporters of farm products spend annually in subsidies.

In recent months Canada has strengthened its GATT negotiating team—doubling the size of its delegation at GATT’S Geneva headquarters to 10 from five and appointing its first full-time ambassador to GATT. But despite American pressure to return what GATT insiders refer to as an “early harvest” of farm trade deregulation by the end of 1988, past reforms of the complex international trade agreement have taken as long as 10 years to achieve.

Last week observers noted a grim irony in Ottawa’s apparent confidence that American protectionism can be restrained within the international trade agreement. The same bills before the House and the Senate that threaten to devastate trade between Canada and the United States contain clauses giving President Ronald Reagan congressional authority to negotiate reforms to international trade rules under GATT. For Canada, that fact posed a painful Catch-22 as its greatest hopes—and worst fears—for the future made their way in lockstep to the floors of Capitol Hill.

CHRIS WOOD

TOM FENNELL

MADELAINE DROHAN

JOHN HOWSE

DEBBIE SCHUG