COVER

THE FUTURE WITH NO DEAL

DISPUTING THE POTENTIAL DANGERS

PEETER KOPVILLEM November 14 1988
COVER

THE FUTURE WITH NO DEAL

DISPUTING THE POTENTIAL DANGERS

PEETER KOPVILLEM November 14 1988

THE FUTURE WITH NO DEAL

COVER

DISPUTING THE POTENTIAL DANGERS

The tremors in the world money markets alarmed many economists. Last Monday, after the appearance of a public opinion poll showing John Turner’s Liberals surging ahead of the Conservatives, the Canadian dollar suddenly dropped sharply in value against its U.S. counterpart. In one day’s trading, it fell almost 1.5 cents to 81.58 cents, erasing the gains it had made since August. Canadian proponents of the Canada-U.S. free trade agreement swiftly claimed that the reason for the decline was clear. As the possibility of Canadians electing a Liberal government on Nov. 21 increased, so did the likelihood of that government’s scrapping the trade agreement. That danger, free trade advocates said, had made world money markets react with uncertainty to the Canadian currency. And Sherry Atkinson Cooper, chief economist at Torontobased stockbrokers Bums Fry Ltd., said that the worst was yet to come. If Canada scrapped the deal, she declared, “We end up with higher

interest rates, higher inflation, lower dollar— and loss of business confidence.”

Turner himself dismissed suggestions that the Liberal rise in the polls had caused the dollar’s decline. He added that financial uncertainty often accompanies election campaigns. Indeed, as Americans prepared to go to the polls to elect a new president on Nov. 8., the U.S dollar also declined against major world currencies. By week’s end, the Canadian dollar remained low, closing at 81.60. And in Canada the likely results of scrapping the agreement were still unclear. Some economists said that, apart from short-term uncertainty, there would be few negative effects. But others predicted severe economic consequences for Canada. It was also unclear how American politicians would react to a refusal to sign an agreement that has been ratified by both the Senate and the House of Representatives and signed by President Ronald Reagan.

For their part, Tory strategists vowed to combat what they repeatedly called the “lies” that Liberals and New Democrats were

spreading about free trade. Said Yuri Kovar, the Conservatives’ director of communications: “Our job now is to dispel all the fearmongering.” But the Tories also helped to create a climate of uncertainty. Finance Minister Michael Wilson raised the spectre of U.S. retaliation, possibly against the 23-year-old U.S.-Canada Auto Pact, if Ottawa did not ratify the trade deal. The Auto Pact, which would be incorporated into the trade accord, commits General Motors Corp., Ford Motor Co. and Chrysler Corp. to having their Canadian subsidiaries manufacture one vehicle in Canada for every one that they sell in the country. Declared Wilson: “Mr. Broadbent or Mr. Turner goes down to the White House and says, ‘Mr. President, we’ve just ripped up the free trade agreement.’ The President looks back at Mr. Broadbent or Mr. Turner and says, ‘That’s a coincidence, because we just ripped up the Auto Pact.’ ”

Alarm: Prime Minister Brian Mulroney himself rang the alarm bells in a speech to the Surrey, B.C., Chamber of Commerce. There, he declared that more than two million existing Canadian jobs are dependent on the security of access to the U.S. market that he said the trade deal will provide. Tearing up the agreement, the Prime Minister claimed, would jeopardize those jobs. And International Trade Minister John Crosbie, who has acted as the government’s main free trade spokesman, appeared on CBC TV’s The Journal to wam of trouble on all fronts if Canada refused to implement the deal. “I think I can quote several economic forecasting firms, including the Economic Council of Canada, who indicate the immediate results would be a flight of capital from Canada, a failure of investment capital to come in here, a lowering in the value of the Canadian dollar

with a consequent increase in interest rates,” he said. “Those would be the immediate economic results.”

But Crosbie, who ignited a minor controversy when he admitted earlier this year that he had not read all of the trade agreement, apparently overstated the Economic Council of Canada’s position. Spokesmen for the council did not directly accuse the minister of misquoting their position. But they swiftly pointed out that the council’s April, 1988, report on free trade—the organization’s official assessment of the agreement—had concluded that “failure to ratify the agreement would be unfortunate but not catastrophic.” And although that study found that free trade would significantly benefit Canada, Sunder Magun, one of the economists who participated in the report, also drew attention to the study’s prediction that, even without free trade, Canada’s “standard of living would nonetheless continue to improve.”

Drastic: But some economists offered a more pessimistic scenario that matched Crosbie’s.

Cooper, for one, told Maclean’s that much of Canada’s economic growth over the past IV2 years has been a result of both domestic and foreign investors pumping money into the Canadian economy in anticipation of free trade. Without the agreement, she said, investors would lose confidence in the Canadian economy. That in turn would cause the dollar to drop drastically— and lead to the Bank of Canada raising interest rates. And because a lower dollar makes U.S. imports more expensive, Canada’s inflation rate would also rise.

In the long run, she added, Canada’s “growth figures, employment figures, would be lower— and it would be a permanent decline over extended periods.”

Cooper and other economists also said that in the absence of the trade agreement, the Auto Pact could in fact be jeopardized. Murray Smith, director of international economics for the Institute for Research on Public Policy, noted that if the U.S. economy suffers a recession during the next few years, some older auto plants in the United States may be forced to close. In that case, U.S. workers and politicians in automanufacturing states could exert strong pressure on Washington to renegotiate the pact and its guarantees of Canadian production—if it is not sheltered under the trade agreement.

In Washington, meanwhile, there was no official comment on the prospects of retaliation if the agreement is not ratified. In fact, U.S. officials said that there had been little discussion there of the future of the accord. As well,

they said, they were reluctant to comment while Canadians were facing an election. Trade Representative Clayton Yeutter and chief U.S. free trade negotiator Peter Murphy told Maclean’s through a spokesman: “We have made a conscious decision not to comment. It is a strictly Canadian affair—we do not want anyone to think we are interfering in any way.” Still, some experts said that there would be the potential for retaliation. Michael Krauss, a Canadian and a specialist in Canada-U.S. trade relations at George Mason University in Fair-

fax, Va., said that it is unlikely Canada would escape countermeasures if it ripped up the deal. “There are those on Capitol Hill who will try to make things worse than the status quo with some kind of protectionist legislation,” Krauss said. “Many people feel there will be a backlash if Canada rejects the package this time.” And, said Democratic Senator Max Baucus of Montana, a member of the finance committee and a leading critic of Canadian trade practices: “There will be little political interest here to reopen negotiations for a second try.”

Fears: Meanwhile, Liberal free trade critic Lloyd Axworthy said that renegotiating the agreement is not on his party’s agenda. Instead, he said, a Liberal government would be

committed to lowering tariffs through multilateral forums—especially at the General Agreement on Tariffs and Trade (GATT)—and not binding the country to bilateral arrangements. Axworthy also said that he has spoken extensively to U.S. politicians about trade issues. “They are not going to be silly enough to start retaliating in a way that would disrupt what is a very good trading relationship,” he said. And he declared that the fears being raised by the Conservatives are “all part of the messianic approach that the Tories are taking—if you don’t get salvation their way, we are all going to hell.”

But even experts from the same bank could not agree as the debate raged last week. Boyd Robertson, Royal Bank of Canada vice-president for Saskatchewan, declared that if the free trade deal did not materialize, the Canadian dollar would drop to 70 cents U.S. and interest rates would rise to as much as 20 per cent. The Bank of Canada rate last week was at 10.63 per cent. But another Royal Bank executive quickly disputed those statements. Allen Yarish, the bank’s assistant chief economist, said that the Canadian dollar would fall regardless of free trade because it is now overvalued. Yarish added that no connection exists between free trade and interest rates.

Sharp: Royal Bank officials quickly circulated a memo instructing employees to refrain from public comment. The bank also issued a news release disclaiming any opinions already expressed by bank staff about free trade. The bank said that it “has no intention of participating in partisan debate on the merits of the agreement or the conseg quences if it were to be nulliI fied.” But the bank also declared, I “It is our view that should the ~ agreement be nullified the immediate effect in Canada would probably be a sharp drop in the value of the Canadian dollar, a correspondingly sharp increase in Canadian interest rates, and a greatly increased risk of recession.”

But some employees clearly remained at odds with the bank’s official stand. One economist at the Royal said, “I don’t see in the long term why interest rates should be any higher than they otherwise would have been.” In fact, the confusion within the Royal Bank seemed to mirror the confusion elsewhere as Canadians confronted the uncertainty over the nation’s economic future—with or without a U.S.-Canada free trade deal.

PEETER KOPVILLEM

PAUL KAIHLA

WILLIAM LOWTHER