COVER/SPECIAL REPORT

The Passion of Two Nations

ROBERT LEWIS November 21 1988
COVER/SPECIAL REPORT

The Passion of Two Nations

ROBERT LEWIS November 21 1988

For an agreement that is causing so much acrimony, the preamble of the free trade accord offers worthy motives: to strengthen “the unique and enduring friendship” between Canada and the United States; to “promote full employment”; and to “contribute to the harmonious development and expansion of world trade.” But acrimony there is, as there has been whenever free trade has reared its head along the 49th parallel. The issue has raised nationalist cries, fueled counterarguments about economic progress and defeated governments (page FT4). On Nov. 21, Canadians will discover how the issue has influenced the outcome of this federal election.

There is no absence of content to generate arguments. In 1,407 pages of clauses and tariff schedules, the Canada-United States Free Trade Agreement defines a new era in Canada’s relationship with its neighbor. If it is implemented by a new government—and that still appears to hang in the balance in the final week of the campaign— the agreement would lead to the elimination of all remaining tariffs on goods crossing the border over the next decade. It would establish a new forum for settling disputes between the two governments—the boardroom, rather than the barnyard.The agreement would not go as far as proponents originally wanted in opening up government contracts in one nation to suppliers from the other. As well, the two parties fell short of producing a code of conduct on the use of government subsidies and other so-called nontariff barriers. The real heat, however, is generated by the concept of “national treatment” and by the agreement to apply the same rules in both countries—on a “no surprises” basis—to commerce in a wide range of sensitive sectors: agriculture, automobiles, energy, financial and service.

The trade agreement has to be read in conjunction with several other documents that it incorporates or modifies, especially the General Agreement on Tariffs and Trade. The GATT, established in 1948, attempts to liberalize trade among 96 member countries, including Canada and the United States.

The terms of the complicated deal are described starting on page FT6. Organized by Business Editor Tom Fennell, the accounts of the various chapters were written by a special Maclean’s team: Senior Writers D’Arcy Jenish, John DeMont and Mary Janigan; Associate Editor Patricia Chisholm; Assistant Editor John Daly; and Researcher-Reporter Brian Bethune.

Their report begins with a description of Chapter 3 of the agreement. Chapter 1 sets out the general objectives of a proposed new “free trade area”: to “eliminate barriers to trade in goods and services”; to foster “fair competition”; to “liberalize” the rules for investment; to establish procedures for making the agreement work; and to “lay the foundation” for further co-operation. Chapter 2 contains definitions of terms that, given the convoluted language of the agreement, are better left to experts and tribunals.


DEFINING THE ACCORD

NATIONAL TREATMENT AND TARIFF REMOVAL

CHAPTER 3: RULES OF ORIGIN

The primary purpose of the free trade agreement is to allow duty-free access to the two markets for the roughly 25 per cent of trade that remains subject to tariffs. In addition to traditional commodities such as chemicals, paper, purses and video recorders, the definition of goods includes those “beneath the seabed” and “goods taken from space.” Because goods are often made with parts and components from several countries, Chapter 3 contains rules for the designation of the national origin of any product and the parts that it is made from. The rules are designed to ensure that foreign producers would not be able to use Canada or the United States to gain duty-free access to the North American market through the back door by performing simple packaging, labelling or minor assembly operations in either country.

In addition to goods that are wholly produced in North America, goods that incorporate raw materials or components from third countries also could qualify for “area treatment” if the free trade agreement becomes law. But to qualify, the third-party goods would have to be sufficiently changed in either Canada or the United States, or the raw material would have to be sufficiently transformed to be classified as a different product. Both Canada and the United States would continue to apply their existing duties and trade rules to products that did not contain the required North American content.

Most goods would be classified for area treatment if the value of the raw materials originating in Canada or the United States, plus the cost of assembling the good, equalled at least half of its export value. A bicycle assembled in Canada with a frame made of Canadian steel could be classified as Canadian even if it has imported wheels and gears. The 50-per-cent rule is contained in Annex 301.2 of the agreement, which sets out the general rules of origin. It also defines how the rules apply to 21 products, from aircraft, ammunition and antiques to umbrellas, vehicles and whips.


Most goods would be classified for area treatment if the value of the raw materials originating in Canada or the United States, plus the cost of assembling the good, equalled at least half of its export value.

However, even if they meet the 50 per cent content requirement, Article 302 prevents goods that originate in Canada or the United States from qualifying for area treatment if they are further processed in a third country. In the synopsis accompanying the agreement, the federal government says that this rule would prevent products assembled in Mexico out of raw materials or components from the United States from entering Canada duty-free.

There is one major exception to the 50-percent rule—in the clothing manufacturing industry. Although the agreement would allow apparel made from fabrics bought from third countries to cross the Canada-U.S. border duty-free, it would be subject to quotas as specified in Article 301.2. The stated intent of the clothing exemption is to allow Canadian manufacturers to “continue to buy their fabric from the most competitive suppliers around the world and still benefit from duty-free access to the United States.” More than 40 per cent of the clothing manufactured in Canada is made from offshore fabrics, such as fine wool from Italy and silks from Asia.

Tale of Two Nations Tale of Two Nations

Each year, under Section 301.2, Canadian manufacturers could export clothing made from a quota of 56 million square yards of offshore fabric to the United States—roughly double current export levels. By 1998, all duty would be removed on the quota. If Canadian exports exceeded that level, manufacturers would have to pay the U.S. tariff but they would receive a refund of duties already paid to Ottawa on the imported fabric.

American apparel-makers would be allowed to export clothing made with up to 11.6 million square yards of imported fabric each year to Canada duty-free, about double their current exports. The quotas could be renegotiated prior to Jan. 1, 1998. At present, American apparel-makers rely on offshore fabric suppliers for less than 20 per cent of their needs, and their exports to Canada are only about half of Canadian exports to the United States. Textile industry representatives in both countries have expressed opposition to the exemption for the apparel-makers, because it would allow the import of more foreign fabric to North America.

But in addition to the apparel exemption, Section 301.2 allows Canadian textile manufacturers £ to export up to 30 million

0 square yards a year of fabric woven or knitted with £ third-country yarn to the

1 United States duty-free, g The quota would be subject to renegotiation at the I end of four years.

CHAPTER 4: TARIFFS

One of the central features of the Canada-U.S. free trade agreement is the commitment by both nations to eliminate all tariffs in stages over nine years. While more than 75 per cent of the trade is now duty-free, tariffs—usually higher in Canada than in the United States—remain on a wide range of goods: 5.1 per cent on U.S. imports of skis, 11.4 per cent in Canada; 5.8 per cent on U.S. imports of furs, 25 per cent in Canada; and four per cent on U.S. imports of furniture, 15 per cent in Canada. The treaty calls for Canada and the United States to phase out a number of other less visible protective practices, such as refunds of tariffs paid on imported goods. The agreement also prohibits either country from imposing restrictions on imports or exports.

The first article of the chapter states, “Neither party shall increase any existing customs duty, or introduce any customs duty on goods originating in the territory of the other party.” It then provides for the elimination of tariffs under three different timetables. If the trade bill passes Parliament, where it would have to be reintroduced by a government in favor of it, tariffs are scheduled to be removed by Jan. 1, 1989, on such items as computers, skates, skis, motorcyles, whisky and some varieties of unprocessed fish. Tariffs would be phased out in five equal steps between Jan. 1, 1989, and Jan. 1, 1993, on goods such as subway cars, furniture and explosives. Finally, tariffs would be eliminated in 10 annual reductions on such products as clothing, railcars, appliances and tires.

At the same time, the agreement allows both countries to speed up the elimination of tariffs on specific items if they choose to do so. Any agreement between the two countries to reduce tariffs faster than scheduled will become a formal part of the free trade treaty. As well, Canada has agreed to continue accepting certain types of machinery and equipment from the United States duty-free because it is not manufactured domestically.

Having dealt with tariffs, the treaty moves to customs user fees and prohibits the introduction of new levies applicable to products from the other country. Currently, Canada does not assess such fees. But the United States imposes a charge equivalent to 0.17 per cent of

either the tariff or the value of the product where no tariff exists. Because those fees are applied to every Canadian good shipped to the U.S., domestic exporters are expected to save millions of dollars annually. Under the agreement, the United States would eliminate the fees in five equal stages between January, 1990, and January, 1994.

Both countries currently assist certain domestic companies by refunding the duties that the firms pay on imported materials or parts— a procedure known as duty drawbacks. A company can qualify for a refund by importing a product and subsequently exporting it. A company is also eligible for such a refund if the imported good is incorporated in a product that is later exported. The agreement stipulates that all duty-drawback schemes would be abolished by Jan. 1, 1994, although it does not set a detailed timetable.

The Canadian government also operates duty-remission schemes under which duties on imported goods are refunded, provided that domestic companies meet certain performance requirements. The treaty identifies four conditions usually attached to duty waivers: that the domestic company export a specified percentage of its goods or services; that domestic goods are substituted for imported goods where possible; that the company purchase other domestic goods; or that the company meet a specific Canadian-content rule in the production of a product. The agreement would prohibit either country from starting any new dutyremission programs, expanding its existing programs or extending any of its current programs to cover new products. In addition, the treaty would stipulate that all duty-waiver

CHAPTER 5 NATIONAL TREATMENT

The agreement bars discrimination against the goods of the other nation in the name of “national treatment,” a concept outlined in the 96-nation trade pact known as the GATT. In the Canada-U.S. agreement, both countries agreed not to impose higher internal taxes, more rigorous regulations or more stringent laws upon foreign goods than they do upon their own domestic products. If Canada boosted taxes on Camel cigarettes, it would have to do the same on duMauriers. On the other hand, if the United States insisted that Canadian baby sleepers carry a “Flammable” label, the same regulation would apply to sleepers produced there.

The agreement makes it clear that “national treatment” in no way undermines either country’s existing laws on the sale or distribution of products—as long as any such law is applied uniformly. According to Ottawa’s official summary of the agreement, Canada “can prohibit or restrict the sale of imported firearms so long as the sale of domestically produced firearms are also prohibited or restricted.” Similarly, all goods “must continue to meet Canadian requirements for bilingual labelling.”

In one sense, Chapter 5 merely reiterates an old commitment made under the GATT. Yet, in another sense, it strengthens the terms of “national treatment” by specifically stating, in the words of the Canadian government’s official summary, that “a province or state cannot discriminate in respect of measures falling within its jurisdiction against imported products.”

Many provinces and states have chosen to ignore the principle of national treatment, and,

for the most part, the two federal governments have been unable to resolve the various disputes. The end result: numerous GATT violations on goods, especially in the sales of imported beer and wine in both Canada and the United States.

In Canada, the reversal of the trend would have significant implications in a number of trade areas. Certainly, there would be some negative results: provinces, for instance, would be prevented from levying heavier taxes on imported wines—a practice that the Canadian government recently agreed to examine after a negative GATT ruling. At the same time, for consumers, that would allow a wider variety of California wines at lower prices, while hurting the Canadian domestic industry. Still, in other cases, Canadian businesses would benefit from more stringent adherence to “national treatment” because their products could be sold in states that now discriminate against them.

programs be phased out by Jan. 1, 1998.

The agreement incorporates many terms of the GATT, the multilateral trade pact originally negotiated in 1948—and its subsequent amendments—that currently governs commercial policy among 96 member nations. Both governments have promised to refrain from imposing import and export restrictions by reaffirming the GATT rules against setting minimum export or import prices. They also agreed not to introduce any new tax, duty or charge on exports to the other country unless such a measure is applied domestically.

Under the GATT, restriction of exports would be permissible in four instances: when there are “critical shortages” of food or other essential products; when domestic cuts are introduced to conserve natural resources; to stabilize a lower domestic price of a commodity; and to secure products in short supply. Article 409 also expands on the GATT by stipulating that both governments would continue to have access to the same proportion of the good as it did in the previous three years despite the restriction. If one nation cut back, the other country would still be allowed to acquire the same proportion as it did before the reduction. Canadian business could charge whatever price U.S. consumers were willing to pay so long as the same price was charged at home, and neither government could interfere by artificially increasing the price of an export.

Finally, the chapter calls for co-operation and consultation between customs officials of the two countries “in order to facilitate the flow of trade between them.” Such co-operation includes notification of plans to close a customs office or port, changes to the hours of operation, rerouting transborder trade and reallocating customs employees personnel. And each country undertakes to co-operate on the collection of import and export statistics, the harmonization of documents used in trade and the exchange of information. □

CHAPTER 6

TECHNICAL STANDARDS

Both Canada and the United States have a series of laws, rules and regulations governing product standards, packaging and production methods. And while the stated goal of those rules is to protect public health, safety and the environment, trade barriers can be created when one country forces its technical standards on the other. Both countries have been involved in a 20-yearold dispute over Canadian federal standards that forbid home-builders from using plywood that contains knotholes larger than two inches in diameter.

American trade officials say that the rules are a nontariff barrier designed to prevent the entry of U.S. plywood into

Canada. The reason: trees grow faster in warmer climates, which causes much U.S. lumber to have larger knotholes. Canadian officials deny the discrimination charges, saying that larger knotholes in plywood used in housing are unacceptable because they allow too much heat to escape during cold winters. But the Americans have claimed that Canada is using the knothole issue to keep its plywood exports out of Canada.

The still-unresolved knothole dispute is so contentious that the two countries included a method for resolving the question in another part of the free trade agreement. But Chapter 6 incorporates an agreement that the two countries signed in 1979 following the Tokyo round of negotiations under the GATT in which they promised to avoid setting technical regulations and standards that would create unnecessary obstacles to trade.

While Articles 602 and 603 are designed to remove obstacles disguised as technical standards, they still would allow both Canada and the United States to pass or maintain rules whose “purpose is to protect health, safety, essential security, the environment or consumer interests.” Even so, the agreement says that those rules cannot arbitrarily discriminate between domestic and imported goods.

Chapter 6 commits each nation to “make compatible its standards-related measures and procedures for product approval with those of the other party.” The free trade agreement also commits both sides to recognizing the other nation’s laboratory-accreditation procedures and product-testing facilities—both of which can become significant barriers to trade during a dispute. In the case of pharmaceuticals, drugs that have been approved by health authorities in one country must often wait years to obtain similar approval in the other. But under the free trade agreement, new government-approved drugs could cross the border with ease.

NEW FREEDOM ON THE FARM

SOME MARKETING BOARDS REMAIN

CHAPTER 7 AGRICULTURE

The starting point is nothing less than a commitment “to achieve, on a global basis, the elimination of all subsidies which distort agricultural trade.” The two countries declared their intention to pursue that objective through the socalled Uruguay Round of GATT negotiations, which will resume next month in Montreal. On a bilateral basis, Canada and the United States agreed to provide better access to each other’s markets for grain growers and meat producers. All tariffs would be phased out over 10 years, with one exception: Canada could impose special annual duties over the next 20 years to protect fresh-fruit and vegetable producers. The agreement would also allow Canada to keep its poultry and dairy marketing boards, which regulate production—and maintain prices—in both sectors. The United States would exempt Canada from import restrictions on beef and veal. Canada and the United States would also try to harmonize their agricultural regulations and standards to remove hidden trade barriers.

In keeping with their commitment to eliminating global subsidies, both countries have promised that they will not apply export subsidies on agricultural products destined for the other country. They also have agreed not to sell their products in the other country’s market for less than the purchase price, plus handling and storage costs. Canada has agreed that subsidies normally available to Prairie farmers under the Western Grain Transportation Act will not apply to grain shipped to the United States through B.C. ports—a major demand of feed-grain producers in the American northwest. Because Midwestern American growers did not express the same concerns, the subsidies would remain for shipments through Thunder Bay, Ont.

Despite the commitment in Chapter 4 to eliminating all tariffs, the negotiators made special provisions for vegetable and fresh-fruit growers. Canada could impose temporary duties on imported American fruit and vegetables if prices of those goods on five consecutive working days were more than 10 per cent below the average import price during the same month over the past five years. But those provisions would not apply if Canada expanded its acreage devoted to fruit or vegetables beyond the average acreage of the previous five years.

Products covered by the deal include fresh, chilled or frozen meat derived from cattle, goats or sheep. Article 704 prohibits both countries from using restrictive measures, such as import quotas or voluntary export restraint agreements, to reduce shipments from the other country. Canada and the United States could impose such restrictions on third countries. If one free trade partner did so and the other failed to apply an equivalent measure, the restrictions on third-country imports could be applied to goods that the other party incorporated in its own products. That provision would prevent either Canada or the United States from circumventing and undermining an attempt to control third-country imports.

Both countries agreed that they would not restrict the flow of wheat, oats or barley, but they retained the right to impose restrictions if imports from the other country increase significantly. The United States also acknowledges in the wording of the agreement that its subsidies on those grains exceed Canadian subsidies, and once the support programs of the two countries reach an equilibrium, the Canadian Wheat Board would no longer be able to issue import permits to prevent American wheat, oats and barley from coming into this country.

Canada’s poultry and egg industries, currently regulated by marketing boards, would experience only minor changes under free trade. Currently, the federal government each year limits imports of U.S. chickens, turkeys and eggs by setting quotas, which would continue under free trade. If shortages occurred during the year, the quotas could be increased. The quotas in the agreement represent the average annual imports for the past five years.

In order to ensure that neither country erected hidden barriers to agricultural trade, both agreed to harmonize technical regulatory standards and inspection procedures. They also would set up reciprocal training programs and, when appropriate, use each other’s personnel for testing and inspection of agriculture and food products. The objective, according to the agreement, is to “work toward the elimination of technical regulations and standards that constitute an arbitrary, unjustifiable or disguised restriction on bilateral trade.”

CHAPTER 8 WINE AND LIQUOR

Canadian complaints about government markups on beer, wine and liquor are rivalled only by official objections in the United States. The issue has been Canadian pricing practices that impose stiff tariffs on imported wine, beer and spirits in an effort to encourage and maintain demand for Canadian products. The GATT also has cited Canada for discriminatory beer and wine pricing. In Chapter 8, beer is exempt. But for liquor, the nations agree to end “discriminatory markups” and “any other discriminatory pricing measure” immediately and to phase out differentials on wine over six years. The aim is to allow spirits and wine to compete on the same basis as domestic products by 1995, whether it is Seagram’s in Alabama or Jack Daniels in Newfoundland.

According to the agreement, the overall goal is to provide “equal treatment for Canadian and U.S. wine and distilled products in each other’s market.” Even so, wine producers and grape growers in British Columbia and Ontario’s Niagara region have argued that they will be hard hit by competition from American wine and liquor if the trade deal goes through.

But even without the free trade agreement, Canada’s markups on wine may already be doomed. The Ontario government has agreed to phase out over 12 years the high tariffs protecting its wine industry to satisfy the GATT.

If the agreement comes into law, all discriminatory tariffs that provincial liquor boards impose to promote domestic wine would be phased out over a six-year period and totally eliminated by Jan. 1,1995. The only additional price that provincial liquor boards would be allowed to apply to U.S. wines and spirits would be the extra shipping and storage costs.

The agreement commits both countries to ending discrimination designed to prevent wine and liquor manufacturers from selling their products in either country. Decisions on which wine or liquor brands receive listings for sale would have to be based on commercial considerations—not country of origin.

The free trade agreement also would wipe out distribution practices that favor domestic wines and spirits. But there are exceptions: wineries or distilleries would be allowed to limit sales on their premises to their own products. Private wine stores in Ontario and British Columbia that existed before the signing of the free trade pact would be allowed to favor their own wine brands. Wine sold in Quebec grocery stores would have to be bottled in the province.

The agreement also enshrines two proud national traditions.. Canada would allow only U.S.-made bourbon whisky to be sold within its borders; the United States would permit only liquor produced in Canada to be sold as Canadian or rye whisky. That provision could become the toast of both nations.

A TRADE-OFF OVER ENERGY

COVER

GREATER U.S. ACCESS, LESS CONTROL

CHAPTER 9 ENERGY

The dilemma is clear: Canada overflows with oil, natural gas and electricity. But the domestic energy market is extremely small compared to the country’s total reserves. The key to growth and prosperity for Canadian energy companies—already exporting about $10 billion worth of products per year—depends on exporting into the huge U.S. market. Free trade in energy has basically existed since 1985, but the trade deal ensures that Canadian producers would have greater access to U.S. consumers by prohibiting export taxes, duties and levies.

But, in turn, Canada has agreed to give the United States greater security of energy supply by placing firm limits on when—and by how much—Ottawa could cut off exports to the United States. And the energy trade-off has stirred stronger opinions than practically any other aspect of the free trade agreement.

Chapter 9 covers coal, oil, petroleum products, natural gas, uranium, electricity, propane, butane and ethane. Article 902 affirms the two countries’ rights and obligations under the GATT with respect to energy trade. Under the agreement—as under the GATT rules— neither country can set minimum prices for energy exports unless they are designed to prevent complaints of product “dumping.”

The agreement also forbids adding export taxes, duties or other charges unless they also apply to energy sold domestically. Taken together, those two measures would stop either country from discriminating against purchasers.

Critics argue that the provisions in Chapter 9 mean that Canada has effectively surrendered control over its energy supplies—a view vehemently rejected by the proponents of the accord. In fact, Chapter 9 closely parallels existing rules on oil, gas, electricity and uranium pricing and exports that the two countries have already agreed to under the GATT.

The trade agreement also would reinforce the GATT provisions prohibiting either country from restricting exports except during emergencies such as supply shortages or for national security reasons. As well, Canada and the United States have agreed to narrow the definition of national security to essentially military or defence matters. For Canada, that means that U.S. energy producers could no longer claim national security as a reason for limiting imports of Canadian energy.

Any cutbacks in exports would be subject to clear limitations in Article 904 of the I agreement. That section says 5 that if Canada restricts exjr ports into the United States, I the United States must still 1 receive “proportional access” to Canadian energy. Proportional access means that Canada could restrict exports to the United States only by the same proportion that it reduces total production. The exact amount would be equal to the average proportion of the Canadian energy that the United States bought over the previous 36 months.

Overall, however, the clause would not give U.S. buyers absolute rights to Canadian energy. In the case of an emergency, Canada would be under no obligation to sell any particular quantity of energy to the United States, as long as it provided American buyers with access to the required proportion of supply. American buyers would have the right to bid for the export portion of oil and gas reserves on the open market with Canadian buyers.

The trade agreement does not necessarily provide the final word in supply matters. The energy provisions of the agreement would be superseded by the oil-sharing commitments that Canada and the United States have under the International Energy Program, a 1974 agreement entered into by 21 countries to deal with oil shortages.

Meanwhile, the agreement provides that two governments could meet if there was a change in regulatory policy by the National Energy Board in Canada, or either the Federal Energy Regulatory Commission or the Economic Regulatory Administration in the United States, which could disrupt energy trade.

The agreement also would allow Alaskan oil—currently prohibited for export—to flow into Canada at a rate of up to 50,000 barrels per day. And both countries agreed to remove restrictions on uranium exports, including Ottawa’s existing requirement that Canadian uranium be upgraded before it is exported.

Future dealings in energy between the two nations, according to the Canadian summary of the agreement, should promote “fair treatment should there be any controls on energy commodities.”

CHAPTER 10 AUTOMOTIVE GOODS

The auto industry is the cornerstone of Canadian manufacturing, employing 160,000 people and generating revenues of $37 billion. Vehicles and auto parts also represent the largest single component of the enormous trade between Canada and the United States. Last year, Canada exported $31.4 billion worth of automotive products, compared with $14.3 billion worth of forest products, Canada’s second-largest export. Since the Canada-U.S. Auto Pact came into effect in 1966, the vehicle and parts industries have grown steadily in both countries and have become integrated on a continental basis, contributing significantly to the prosperity of Central Canada. The free trade agreement incorporates the Auto Pact, which guaranteed Canada a share of production in rough proportion to the sales of the Big Three.

The agreement also introduces strict new North American-content rules to make the Canadian and American auto industry more competitive with its rivals, particularly Japan and Germany. If the agreement is implemented, it would also allow third-nation automakers with assembly plants in North America to move their products across the Canada-U.S. border duty-free, a stipulation aimed at attracting foreign investment. They could not, however, become members of the Auto Pact.

According to Article 1001, the policy of the free trade agreement is to administer the Auto Pact “in the best interests of employment and production in both countries.” For Canada, the Auto Pact contains two important safeguards. In order to receive duty-free access to the Canadian market, a maker of vehicles must produce one auto in Canada for every one sold in the country. Secondly, vehicles or parts produced in Canada must contain at least 60 per cent Canadian content. Automotive manufacturers based in Canada can import vehicles or parts from anywhere in the world duty-free, provided they are meeting the two so-called safeguards. For the Americans, the Auto Pact applies only to vehicles imported from Canada. It gives vehicles or parts from Canada dutyfree access to the United States, provided they contain 50 per cent Canadian or North American content.

Critics of free trade have argued that incorporating the Auto Pact into the agreement is meaningless because both countries have agreed to eliminate all tariffs over a period of 10 years. As a result, according to the critics, the threat of having to pay the duties on vehicles and parts imported into Canada, which forced manufacturers to comply with the safeguards, will be eliminated. Advocates of the deal argue that the provisions of the Auto Pact, which apply only to Canada, can be used to enforce the safeguards.

Although the Auto Pact would remain in the agreement and Canada has retained safeguards protecting its own auto industry, a new North American-content rule * would determine whether veá hides and parts could continue to cross the border in either direction duty-free. That g rule stipulates that 50 per I cent of the materials and 50 r per cent of the direct manufacturing costs would have to be North American.

It also contains a much narrower definition of North American content than the current rule in the Auto Pact, which determines whether automotive products from Canada can enter the United States duty-free. A manufacturer could no longer include expenses such as marketing, distribution and salaries for supervisory, administrative or clerical employees in order to meet the new content rule. As a result, manufacturers would be forced to increase their purchasing and manufacturing in North America.

The agreement also includes a list of 194 Canadian vehicle and parts manufacturers who are now meeting the safeguards in the Auto Pact and could continue to import duty-free from third countries. In addition to General Motors of Canada Ltd., Ford Motor Co. of Canada Ltd. and Chrysler Canada Ltd., the qualifying list includes bus manufacturers, makers of off-road vehicles and trucks, parts producers and suppliers. The Canadian government would review the performance of those companies during the 1989 model year, which ends on Aug. 31, 1989.

Prior to the drafting of the free trade agreement, no non-North American auto manufacturer, except Volvo Canada Ltd., had qualified for Auto Pact status by

TRADING WITH A GIANT

Value of Canadian Exports to the United States

Canadian Exports to the United States Canadian Imports from the United States

90

80

70

60

50

40

30

20

10

0

meeting the safeguards— and none will be members of the Auto Pact in the future.

Manufacturers falling into that category include BMW Canada Inc., Nissan Automobile Co. (Canada) Inc. and Jaguar Canada Inc. Most of those companies have restricted their activity in Canada to sales and distribution.

Those who are manufacturing in Canada would be required to meet the 50-percent North American-content rule in order to move vehicles across the Canada-U.S. border duty-free. If they did not meet the new content rule, they would be forced to pay duty on a vehicle manufactured in one of the two countries and shipped to the other. If, for example, South Korean-owned Hyundai produced a car in Quebec and exported it to the United States without 50-per-cent North American content, American customs would treat the car as a South Korean product.

The free trade agreement would also result in the elimination of two different types of so called duty-remission programs set up by the Canadian government. The programs were designed to encourage foreign vehicle manufacturers to purchase parts in Canada.

Under the first of those programs, a foreign manufacturer selling vehicles in Canada can purchase Canadian parts in order to export them to assembly plants at home or in third countries. For every $1 of Canadian content in those parts, the federal government awards the foreign manufacturer a 70-cent credit. The credit is then used to reduce the price of the manufacturer’s vehicles at the Canadian border and consequently the duty payable.

According to the free trade agreement, 13 foreign manufacturers, including Mazda Canada Inc., Mercedes-Benz of Canada Inc. and Fiat Canada, now qualify for such export-based duty remissions. The agreement would prohibit them from exporting parts purchased in Canada to the United States and it also says that all such programs would be terminated by Jan.l, 1998.

Canada had also set up a so-called production-based duty-remission scheme. The free trade agreement says that it currently applies to CAMI Automotive Inc., a joint venture between General Motors and Suzuki, Honda of Canada Mfg., Inc., Hyundai Auto Canada Inc. and Toyota Motor Manufacturing Canada Inc. Currently, those companies are manufacturing or building plants in Canada. Because they are deemed to have made substantial investments in Canada, they would be entitled to a $1 reduction of customs duties for every $1 of Canadian content in the parts they purchase. The agreement stipulates that those programs would end no later than Jan. 1, 1996.

In addition to dealing with specific trade irritants, the agreement recognizes “the continued importance of automotive trade and production for the economies of the two countries.” It also acknowledges that the auto industry is going through rapid change on a worldwide basis. In order to ensure that the North American industry remains competitive, the two countries would establish a select panel of auto experts to advise the governments and private companies of both nations.

And despite the magnitude and complexity of the automotive trade, the agreement includes something that the average motorist can relate to. Canada has agreed to lift a decades-old embargo on the import of used cars from the United States. Beginning in 1989, Canadians could bring in used cars that were at least eight years old duty-free. By 1994, the age restriction § would be phased out entirely and Canadians could import ú any used car without duty.

TARIFFS AND DUTY-FREE

U.S. TARIFFS* ON SOME CANADIAN GOODS

• Beer made from malt: 1.6(p/litre

• Sparkling wine: 30.9t;c/litre

• Cigarettes: 5%

• Milk: 5c/litre

• Natural-fibre suits: 77.2t;t/kg+20%

• Women’s silk blouses: 7.5%

• Aluminum windows: 5%

• Nuclear reactors: 6.5%

• Word processors: 2.2%

• Answering machines: 3.9%

• Gold necklaces: 6.5%

• Paper plates and cups: 4.3%

• Umbrellas: 8.2%

• Microwave ovens: 4%

• Leather shoes: 10%

* The percentage markup is on Source: The Canada-U.S. Free

GOODS ENTERING U.S MARKET TARIFF-FREE

• Public-transit vehicles

• Motor vehicles

• Human/animal vaccines

• Aluminum civil aircraft pipes

• Scrap iron and steel

• Natural gas

• Gold and silver bullion

• Electrical energy

• Newsprint

• Newspapers and periodicals publishing four times a week

• Parts for cooking stoves

• Antiques over 100 years old

• Coal

• Purebred breeding animals

• Raw fur

the wholesale price of the product Trade Agreement Tariff Schedule

EMERGENCY MEASURES

RELIEF ACTION WHEN EXPORTS SURGE

CHAPTER 11 EMERGENCY ACTION

What happens if Cooper floods the United States with duty-free hockey sticks? Or cheaper Louisville Slugger baseball bats overload the racks at Eaton’s? International trade treaties usually include so-called emergency actions, which can be imposed to protect a domestic industry that has been hurt by a sudden and unanticipated surge of imports. In one such case, Canadian shoe manufacturers complained that they could not compete against a deluge of brightly colored women’s “candy” shoes. As a result, the federal government imposed a global quota on such shoes, even though most were coming from Italy and Taiwan. In Chapter 11, the emergency action provisions allow both governments to use tariffs to defend a domestic industry.

If the free trade agreement goes into effect on Jan. 1, 1989, as scheduled, all tariffs between the two countries would be eliminated over a 10-year period. In the event that a Canadian industry is suddenly flooded by U.S. imports and unable to compete during the transition period, the federal government could take two actions under Chapter 11: either it could suspend the tariff reductions for up to three years or it could increase the tariff.

But either government must meet certain conditions in order to use Chapter 11. The other country must be notified of a pending tariff action, and consultation must take place.

And emergency action can be taken against a specific product only once during the transition period.

As well, if one country used Chapter 11 for protection, it would have to compensate the other country with equivalent tariff reductions on another product. If the partners failed to agree on compensation, the agreement states that “the exporting party may take tariff action having trade effects substantially equivalent to the action taken by the importing party.”

The agreement also allows Canada or the United States to impose emergency actions against global trading partners under the GATT. At the same time, Chapter 11 allows Canada and the United States to exempt each other from measures aimed primarily at third countries. In fact, Article 1102.1 stipulates that Canada and the United States would be exempt from a global emergency action provided that their share did not exceed 10 per cent of the total imports of the offending product.

CHAPTER 12

EXCEPTIONS TO TRADE

If there is a place in the free trade agreement where free traders will frown, it is Chapter 12. Herein reside most of the bargained exceptions and exemptions which—as the Canadian summary of the agreement puts it—“recognize that governments must retain some freedom of action to protect their legitimate national interests.” The widely accepted policy guide for “national interest” exceptions is contained in the GATT and has been incorporated into the Canada-U.S. treaty. Among the situations in which an exception to free trade may be made: the protection of human, animal or plant life; trade in gold or silver; and the protection of national artistic or historical treasures.

In addition, some specific sectors have already been singled out as exceptions and are protected in Chapter 12 of the agreement. Those include continued controls on the export of logs from both countries, of unprocessed fish from Eastern Canada and of Canadian beer— and, most important of all, the exemption of the U.S. Jones Act, which would continue to require that imports to the United States through American ports be carried on U.S. ships.

Without thé beer exemption, Canadian breweries would likely drown in a flood of cheap American-made beer, because breweries in the United States are much larger and could easily outproduce their Canadian counterparts.

Eastern Canadian fish plants would benefit more from the agreement than would the West Coast fishery. The agreement allows Quebec and the Atlantic provinces to keep existing restrictions on unprocessed fish exports, a protection for eastern Canadian fish processing plants. But Canadian negotiators were unable to secure an exception in the agreement for the West Coast industry, which was the subject of a GATT panel review during the free trade negotiations.

The existing restrictions on log exports are designed to ensure that domestic processors do not run short of wood. Other Canadian and U.S. laws that protect the log processing industry also would remain. Also untouched would be the Jones Act, a bow to the powerful U.S. shipping industry. The GATT provisions for exceptions in the national interest, incorporated in the agreement, have been used by other nations to justify prohibitions on trade in pornography; laws that protect the environment and endangered species; and product standards and regulations relating to trade in gold and silver. The GATT provisions also protect producers from competition in goods produced by cheap prison labor and allow nations to participate in international commodity cartels.

OPENING UP THE PUBLIC PURSE

COVER

BIDDING ON GOVERNMENT CONTRACTS

CHAPTER 13 FEDERAL PURCHASES

Procuring along the 49th parallel is suddenly in vogue. The rules for official buying—known as government procurement policies—are described in the Canadian commentary accompanying the free trade agreement as “important new progress in expanding the market opportunities for suppliers of goods to government markets.” The agreement gives Canadian and American businesses greater access to the public treasury across the border. For Canadians, it is estimated that the market would grow to approximately $3 billion from less than $20 million. The market for American suppliers would go to $400 million from about $20 million.

Primarily, the new markets would be created by expanding the number of contracts open for cross-border bidding. The present GATT code prevents bidding on any contract worth less than $171,000 (U.S.). If free trade becomes law, Canada and the United States have agreed that businesses in both countries would be able to bid on government contracts of $25,000 and up in U.S. dollars and its Canadian equivalent at the time.

To facilitate the process, Chapter 13 makes improvements in so-called transparency procedures between the two countries. That means that each government would provide potential suppliers with equal information and opportunity as well as fair and nondiscriminatory consideration. Each country also would maintain an independent review board that would ensure “equitable, timely, transparent and effective bid-challenge procedures for potential suppliers of eligible goods.” In addition, the parties have agreed to “co-operate in monitoring the implementation, administration and enforcement of the obligations” of the chapter.

Despite the stated advances, government procurement in both Canada and the United States continues to be an area of trade better known for restrictions than freedom. The provisions would not apply to state, local or provincial governments. And they would maintain the number of government departments or agencies that currently allow access to foreign

suppliers under the GATT code: in Canada, 22 government departments and 10 agencies; in the United States, 11 government departments and 40 agencies as well as NASA and major U.S. purchasing agencies.

In addition, notable exceptions remain. In Canada, the departments of transport, communications, and fisheries and oceans are not included, along with certain areas relating to national security. In the United States, the departments of energy and transportation are not covered, along with the great majority of Pentagon purchases.

Many free trade analysts have criticized the exclusions and omissions. They cite the $3 billion that Canada would have access to as a small proportion of the estimated $320 billion of annual U.S. federal government expenditures on goods.

The other exemption on government procurement relates to special programs for small business and minority hiring. Under Washington’s Small Business Administration, businesses defined as being small for their economic sector—usually with 500 or fewer employees—qualify for a “set aside” program, which prevents larger firms from bidding on a government contract. And small American businesses procure an estimated 10 per cent of all government contracts—an amount that is equivalent to the total public sector expenditure on goods and services in Canada.

Article 1307 of the agreement states that both Canada and the United States “shall undertake bilateral negotiations with a view to expanding the provisions of this chapter” within one year following the conclusion of the current GATT renegotiations. However, the United States has already declared at GATT sessions that it opposes more open foreign access to its public spending—until that becomes common practice around the world. □

CHAPTER 14 SERVICES

The official Canadian summary bills Chapter 14 as a “trailblazing effort,” the first time that a trade agreement has covered services, in addition to goods. The agreement applies to a wide number of service sectors, and that has sparked strong controversy—and led to the emotional charge that it will damage Canada’s health-care industry. According to the free trade pact, both Canada and the United States decided to address the issue of trade in services because it “represents the frontier of international commercial policy in the 1980s.”

Chapter 14 establishes that one nation will accord to eligible persons from the other country “treatment no less favorable” than it does to similar businesses or individuals at home. The agreement sets out a framework for opening up trade in services in such industries as agriculture, forestry, mining, distribution, construction, real estate, insurance, computers, tourism and architecture. Excluded from the agreement are transportation, doctors, dentists, lawyers and child-care services, as well as government services such as health, education and social services. The election controversy in this area erupted because the agreement includes “health-care facilities management services” under the “management services” category in Annex 1408 and, elsewhere in the text, defines the concept of “national treatment.”

In general, the agreement is designed to free up trade in services by applying the “national treatment” provision at the federal, provincial and state levels. If the agreement is implemented, that would mean Canadian and American suppliers of services covered by the agreement, and who conduct business in each other’s countries, cannot be discriminated against. Governments would be prohibited from imposing discriminatory or arbitrary taxes upon foreign suppliers. And they could not demand that foreign suppliers establish a company or presence within their borders.

The agreement also includes a further provision that licensing and certification rules would not, in the wording of Article 1403, “have the purpose or the effect of discriminatorily impairing or restraining the access” of foreign suppliers. Singled out for praise in the government’s synopsis of the agreement are the Royal Architectural Institute of Canada and the American Institute of Architects— which are now trying jointly to develop acceptable professional standards for both countries. But the agreement says that governments and interested professional bodies in the two countries should “encourage the mutual recognition of licensing and certification requirements for the provision of covered services” by foreign suppliers.

In outlining those obligations, the agreement states that both the f Canadian and American governments would continue to steer x their own courses. They would still

1 be free to establish monopolies as ô long as they offer prior notice to ö affected parties and establish that I those steps would be necessary for “prudential, fiduciary, health and safety or consumer protection reasons.” At the same time, governments would not be required “to change any existing laws and practices.”

Even so, it was the clear intent of both signatories that changes in the service sector would come. Currently, most of the regulations or practices that limit foreign trade in services have time limits. According to the free trade act, when covered services expire, any new agreement “will have to conform fully to the national treatment obligation.”

According to the federal government—as well as many business groups—Canadians will benefit from the liberalization of trade in services. Services currently account for 70.5 per cent of Canada’s gross domestic product and 76 per cent of the country’s total employment. And supporters argue that any agreement that formalizes and secures access to the large American marketplace is good news.

But critics argue that opening up the Canadian service marketplace to Americans is a cause for alarm. For one thing, they insist that they are concerned over Canada’s ability to compete with the United States in the service area. They note that, while the United States has long been a leading v service exporter, Canada’s performance in that field has been lacklustre. 3 The figures from 1986 illustrate their g concern: the United States achieved a I $2 5-billion surplus on its services ¡2 trade account that year—while Canada had a $4.5-billion deficit.

ON-THE-JOB TRAVEL

COVER

A PROPOSAL TO END BORDER RED TAPE

CHAPTER 15 TEMPORARY ENTRY

As testy confrontations at international airports indicate, Canadian business travellers have been a special concern of American immigration rules. Those procedures often make it difficult for managers, salesmen, technicians and professionals to cross into the United States to conduct business and service clients. In fact, Canadian entrepreneurs have often experienced delays and sometimes have been barred from travelling to the United States for business purposes. But Chapter 15 of the free trade agreement includes new rules to make it easier for business travellers from both countries to cross the border. According to Article 1501, the new rules reflect “the special trading relationship between the Parties, the desirability of facilitating temporary entry on a reciprocal basis and of establishing transparent criteria and procedures for temporary entry.”

The new rules stop short of limiting the ability of Canada or the United States to manage their distinctive immigration policies. But they reduce the criteria for business travellers going to either country. And they also ensure that applications for temporary entry would be processed with fewer complications to prevent costly delays for business people.

To ensure that the new rules apply only to legitimate visitors, the agreement divides business travellers into four categories: business visitors, traders and investors, professionals, and intracompany transferees. To qualify for easier entrance into the United States, Canadian business travellers who meet the normal health and safety standards would only need to present proof of Canadian citizenship and demonstrate that they qualify for entry under one of the four categories. The same would apply for U.S. entrepreneurs wanting to cross the border into Canada.

Under the agreement, anyone could gain temporary admission to the United States or Canada by applying at any border point and supplying proof that they fall into the “business visitors” category. The business-visitors group includes people working in research, design, manufacturing, production, marketing, sales, distribution and after-sales service. And the category also includes general-service personnel working in industries such as computers, financial services, public relations and tourism.

But Canadian or American “professionals” would also qualify for easier cross-border access as long as they work in one of the fields specified in the agreement. The lengthy list includes: accountants, engineers, scientists, research assistants, doctors, dentists, nurses, veterinarians, architects, lawyers, teachers, economists, social workers, mathematicians, vocational counsellors, hotel managers, librari-

ans, animal breeders, plant breeders, range managers, foresters, journalists, nutritionists, dieticians, technical writers and computer systems analysts.

In certain cases, the agreement defines the qualifications expected: hotel managers, journalists and mathematicians must hold a bachelor’s degree. The journalists and hotel managers also must have “three years’ experience.”

Under the agreement, Canadians involved in trading goods and services in the United States and entrepreneurs who have invested, or plan to invest, large amounts of capital in the United States would also qualify for the new temporary-access rules under the “traders and investors” category.

Life would also be simpler for people being transferred by their companies between Canada and the United States. Provided they have been working for the firm for at least a year, they would qualify for less-restrictive rules and would be able to gain approval for temporary immigration in less than the current 90-day qualifying period.

To ensure that no problems arise in the future over business immigration, the agreement calls for disputes to be directed to the joint Canada-United States Trade Commission. But complaints could be made only if a clear pattern of discrimination appears—or if a request for temporary entry is not decided within one year of application. Meanwhile, the two governments will meet at least once a year to monitor the new rules and also discuss ways of facilitating cross-border business travel. If management consultants are needed for the task, they are free to travel under the agreement. □

BUYING ACROSS THE BORDER

CHAPTER 16 INVESTMENT

The very term “foreign ownership” has served as a battle cry for Canadian nationalists. But under Conservative Prime Minister Brian Mulroney, Canada was declared “open for business.” The critics insist that in Chapter 16 Canada has given up too many of its rights to control American investment. In its summary of the chapter on ownership, one of the most contentious in the agreement, the government declared, “A hospitable and secure investment climate is indispensable if the two countries are to achieve the full benefits of reducing barriers to trade in goods and services.”

The goal of the chapter is to permit investment capital to cross the border more freely, and to treat American and Canadian investors in a fair and predictable manner. The agreement applies the concept of “national treatment” to most investment. Canadians doing business in the United States would be treated as though they were American investors, and Americans doing business in Canada, as though they were Canadian.

National treatment will apply only to investment laws and practices enacted in the future. Because national treatment applies only to future laws, most restrictions on foreign investment already in place will remain in effect. The agreement specifically exempts from national treatment several kinds of cultural enterprises, including radio, television and cable companies, and firms that publish or distribute books, magazines, newspapers, films, videos or music recordings.

The most important change is to the Investment Canada Act, which now allows the federal agency—the Conservative successor to the former Liberal government’s Foreign Investment Review Agency—to review and block proposed takeovers worth more than $5 million. The agreement would raise the threshold for review to $150 million in stages over a four-year period, ending in 1992.

The government’s summary also says that the existing review mechanism will continue to operate in the energy sector. All proposed acquisitions by Americans in the natural gas, oil and uranium industries that are valued at $5 million or more—the current threshold—will continue to be reviewed by Investment Canada.

At the same time, by January, 1992, Investment Canada would no longer review so-called indirect takeovers, as it does now, where an American parent of a Canadian subsidiary is taken over by another American company. Currently, the United States does not review indirect takeovers. In addition, neither side may impose certain so-called performance requirements on foreign investors. The prohibited restrictions are listed in the agreement.

The exemptions to the agreement include all businesses—in* eluding federal and provincial Í Crown corporations—that exist x when and if the free trade act is I implemented. As well, national “ treatment does not apply to the 8 financial services industry, from £ banks to securities dealers—except insurance; government purchases of goods and services; or transportation services. National treatment would not apply to the “conduct and operation” of noncovered services such as education and health care. Those services could be owned by American investors, but Canada would retain the right to determine how they are run.

And either government could impose new laws that tax foreign-owned businesses on a basis different from domestically owned firms, so long as the taxation did not amount to “arbitrary or unjustifiable discrimination.” Expropriations of businesses owned by investors of the other country would continue to be permitted but only under certain conditions. The expropriation must be for a public purpose, in accordance with the due process of law, nondiscriminatory, and only after “payment of prompt, adequate and effective compensation at fair market value.” Transfers of profits, royalties, or the proceeds from the sale of any business in either country would be unrestricted, except where such transfers are inconsistent with certain laws, such as bankruptcy. Disputes about the investment provisions—except those by Investment Canada—would be resolved under the dispute mechanism (Chapter 19).

COMPLICATIONS FOR THE BANKS

COVER

FINANCIERS FACE A NEW CHALLENGE

CHAPTER 17 FINANCIAL SERVICES

For Canada’s financial institutions— banks, trust companies and securities dealers—massive federal regulatory reforms last year resulted in far more significant changes than any that are proposed under free trade. Still, the reforms have created concerns for some Canadian financial institutions operating in the United States. They say that they could suffer a competitive disadvantage. Banks and trust companies in Canada—including foreign institutions—are now permitted to own securities firms. And all of the major Canadian banks now have brokerage subsidiaries. But banks in the United States— foreign and domestic—are prohibited from owning securities companies.

Canadian financial institutions welcomed the Canadian reforms. But they remain unhappy that American financial institutions now have greater freedom in Canada than Canadians do in the United States. That has created problems for Canadian banks with their newly acquired securities arms, some of which have U.S. branch offices. Because of their new Canadian bank affiliations, the securities firms could face restrictions under American law.

The free trade agreement attempts to help solve that problem. Already, U.S. laws regulating banks are under review, and members of the financial services industry on both sides of the border believe that, in the future, U.S. banks will be permitted to own securities dealers. Chapter 17 would extend those changes to Canadian institutions operating in the United States once the House of Representatives and the Senate pass them. And even if the American reforms do not take place, the agreement states that bank-affiliated Canadian dealers operating in the United States would be allowed to sell Canadian government securities.

The Canadian government and the provinces are the largest issuers of securities in Canada. Among its securities activities, the Canadian government and the provinces often raise U.S. funds in American financial centres such as New York City. Historically, those government underwritings have constituted about 80 per cent of the operations of Canadian dealers in the United States.

In return, Canada has made concessions in the area of foreign ownership that could lead to future changes, both for Canadian institutions operating in the United States and for American corporations expanding into Canada’s financial sector. Currently, foreign ownership I of financial institutions under 5 federal jurisdiction is limited I to a total of 25 per cent. The I agreement would do away with the 25-per-cent rule for U.S. investors. Chapter 17 does not change the existing Canadian law that no individual, corporation, or group of connected persons or companies—foreign or domestic—may own more than 10 per cent of a single Canadian bank. A single Canadian investor, or group of investors, would continue to be free to own up to 100 per cent of a U.S. bank.

American ownership of Canadian banks could indeed increase. That has led to controversy, because some critics point out that individual American investors could own a series of 10-per-cent share positions in a Canadian bank, so long as they were not affiliated. That could lead to a Canadian bank being controlled or owned outright by American investors. But spokesmen for the banking industry say that the scenario is unlikely. Because Canadian banks are so widely held, blocks of 10 per cent are very difficult to accumulate, bankers say. In addition, they say that there is little incentive for a group of unaffiliated foreign investors to take over a Canadian bank, since none would have control.

Another foreign-ownership provision also would be lifted in favor of American-owned banks operating in Canada. Currently, Canada places a ceiling on the total assets that foreign banks operating in Canada may own: 16 per cent of Canada’s total banking assets, including foreign and domestic banks. Chapter 17 would exempt American banks operating in Canada, of which there are already 15, from that ceiling and therefore allow them to expand without restriction. But whether or not American banks would choose to expand aggressively is unclear. The 16-per-cent ceiling currently applies to the 57 foreign banks operating in Canada, yet the total of their Canadian assets has reached only about 11.4 per cent of the whole Canadian industry. □

CHAPTER 18 INSTITUTIONAL RULES

In terms of trade value, Canada and the United States are the largest trading partners in the world. With such high stakes, it is not surprising that there have been celebrated faceoffs in recent years—or that the two partners have had to compromise on the terms for the referees. In recent years, Canada became the first country ever to launch a punitive-duty action against a U.S. export when it sought to limit American corn at the border. That step served as an offset to U.S. actions against the import of Canadian softwood lumber and uranium. Those disputes centred on one of two issues: subsidies or pricing. The free trade negotiators anticipated that implementing a comprehensive treaty would also cause scores of other arguments involving interpretation and application. As a result, they attempted to provide for orderly resolution of disputes before the new CanadaUnited States Trade Commission and its panels of arbitrators.

At the outset, Chapter 18 stipulates that either country can use dispute-solving panels that already exist in the GATT for resolving arguments that do not relate to tariff or antidumping cases. Those cases arise when a country believes government subsidies are involved or products are being sold below the cost of production in their jurisdiction. Under Chapter 18, both governments can also elect to rely on the provisions of the agreement, but they cannot use both.

If the agreement is implemented, the Canada-U.S. Trade Commission would be composed of the Canadian and American cabinet ministers responsible for international trade or their appointees and an unspecified number of government representatives. If one country decided to pass a new law or amend an existing one that might undermine or violate the free trade agreement, the agreement requires that the country first send written notification to the other country. Either party could then request a meeting in an attempt to reach a mutually satisfactory solution. If consultations failed during the specific time allowed, the dispute would automatically go to the commission, which could call in technical advisers or appoint a mutually acceptable mediator.

The commission could also refer a lingering dispute to a five-member binational panel for binding arbitration. Panels would have at least two members from each country. They would be selected from rosters developed by the commission. Individual members would have to possess technical expertise in a specific area and would be selected from nongovernment institutions. The panels are distinct from those provided for in Chapter 19 dealing with allegations of unfair trading, although they would be selected in a similar manner. According to Chapter 18, each country would choose two members, with the fifth member selected by the commission. Failing consensus by the commission, the four panelists would attempt to choose the fifth panelist. Should that step fail, the person would be drawn by lot from a list of selected names.

During a specific dispute, both countries would be guaranteed the right to at least one appearance before the panel. They would also be allowed to submit written arguments and rebuttals. Panels would rule on whether an action is inconsistent with the agreement but would pass their decisions to the commission for resolution. If the commission ruled that the offending measure must be withdrawn or amended and the country that had introduced it refused to comply, the other country could suspend a benefit of equivalent effect. The referees would call that getting even. □

BUSINESS ACROSS THE BORDER

A Sampling of Canada-U.S. Trade in 1987 (Thousands of $cdn.)

Cdn. Imports Cdn. Exports

• Meat, Fresh, Chilled or Frozen 239,144 755,222

• Dairy Produce, Eggs, Honey 56,665 40,635

• Wheat 58,703

• Tobacco 15,098 74,404

• Scrap Iron and Steel 74,899 101,703

• Crude Petroleum 138,006 4,819,759

• Natural Gas 2,527,254

• Iron Ore and Concentrates 248,499 425,182

• Coal 726,450 11,175

• Lumber 406,509 4,231,989

• Newsprint Paper - 5,084,171

• Electricity 9,014 1,199,764

• Nickels and Alloys 45,603 398,409

• Aircraft with Engines 703,288 234,980

• Trucks, Tractors and Chassis 2,993,503 5,963,370

• Cars and Chassis 8,580,625 14,021,174

SOURCE: STATISTICS CANADA

JUDGING THE TRADE RULES

COVER

DISPUTES WILL GO TO A NEW PANEL

CHAPTER 19 DISPUTE SETTLEMENT

Shingles and shakes. Steel ingots. Buffalo, N.Y., television commercials. They may not have the ring of grand designs, but in the history of Canada-U.S. relations they have been the subject of protracted debate—and charges of unfair trading.

U.S. and Canadian trade laws allow private interests to make their case for antidumping or countervailing duties against imports. One of the most recent examples was the U.S. lumber industry’s allegations in 1986 that Canadian exports of softwood lumber were being unfairly subsidized. To avoid the 15-per-cent tariff handed down by the U.S. department of commerce, Canadian logging companies, unions and the provinces agreed to an export tax of 15 per cent. The dispute settlement mechanism outlined in Chapter 19 was designed to resolve conflicts without jarring countermeasures.

The chapter provides for the creation of five-member binational panels—two Canadians, two Americans and a mutually agreeable fifth—to review antidumping or countervailing duty decisions by tribunals. The panels would handle appeals that currently go through the courts, and their decisions would be binding and final. They would have the power to uphold a decision by a tribunal. But they could also order the tribunal to overturn its decision, or reduce or increase a countervailing duty. Article 1907 stipulates that, within seven years, the nations should seek to develop new rules for

dealing with unfair pricing and “the use of government subsidies”—one of the articles that Liberal Leader John Turner, challenged by Prime Minister Mulroney, cites as a threat to to medicare.

While the negotiations are taking place, Canada and the United States would retain their current trade remedy laws. Those allow both countries to impose countervailing duties on imports subsidized by the other country. The agreement recognizes that amendments could be passed that do not conform to the GATT or that amendments could be used to overturn previous panel decisions on subsidies or dumping. In such cases, one country could ask for a binational panel to review the other’s amendment. If the panel agreed with the complaint, the countries would be ordered to seek a mutually satisfactory solution, through consultation, within 90 days. A new amendment, compatible with GATT and the agreement, would have to be passed within nine months of that consultation period. Alternately, the other country could retaliate with comparable amendments to its trade laws.

In addition to dealing with amendments to the trade laws of Canada and the United States, Chapter 19 also defines the structure and role of the binational panels. Effectively, they would replace the courts as the means of appealing administrative decisions in trade cases. Should the Canadian Import Tribunal or the U.S. department of commerce levy a countervailing or antidumping duty against a product or an industry, either country could seek a review of the decision by a binational panel.

The panels would be chosen from a permanent list of 25 Canadians and 25 Americans, most of them lawyers. Within 30 days of a request for a panel, each country would select two members. The two countries then would have 55 days to select a fifth member. If they could not reach a decision, the four panelists would be entitled to select a fifth member. Failing that, the fifth panelist would be selected by drawing lots, although anyone previously rejected would not be eligible.

The agreement also imposes a strict time limit on panel decisions. A final ruling would have to be issued within 315 days of the date on which a panel was requested. By comparison, court appeals of tribunal decisions can last for two to three years. Panels would review transcripts of tribunal hearings and documents submitted to the tribunal. They would accept written briefs from both complainants and respondents, would allow for replies to the briefs and would hear oral arguments. The panels could uphold the countervailing or antidumping duty imposed by the tribunal. Alternately, the panel could order the administrative tribunal to increase, decrease or eliminate such a duty. Finally, the text of the agreement says that panel reviews would be a binding on both countries and I could not be challenged: I “Neither party shall provide ic in its domestic legislation for r an appeal from a panel decision to its domestic courts.”

BOW TO CULTURE

FOUR KEY EXCEPTIONS UNDER THE ACT

Chapter 20 is the repository for provisions that did not fit anywhere else, from a ban on unauthorized sneak previews of U.S. television shows to measures protecting national security. For Canadians, the most notable of the miscellaneous articles are those pertaining to the cultural industries— broadly defined as publishing, radio and TV, and film, audio and video recordings.

The first paragraph of Article 2005 states flatly, “Cultural industries are exempt from the provisions of this Agreement.” There are four specific exceptions. One calls for the removal of tariffs on materials and products, such as recording tape and records. The second forces the Canadian government, in the absence of a private domestic buyer, to offer “fair openmarket value” for any foreign-owned cultural enterprise when Canadian law requires its sale to Canadians.

That provision enshrines the federal government's 1985 policy on foreign ownership in the publishing industry that led to the purchase in December, 1986, by Toronto-based publisher Anna Porter of Doubleday Canada Ltd., after its New York City parent had been purchased.

The third exception addresses a long-standing border irritant. By 1990, Canada would have to amend its copyright law to force Canadian cable TV companies to pay for U.S. programs it captures and retransmits. Furthermore, the permission of the copyright holder would be required for altered or “nonsimultaneous" retransmission, meaning Canadian iv stations could no longer routinely show U.S. programs before American border TV stations did. Canada could still require cable companies to black out material deemed obscene or to prohibit ads—including beer commercials.

The fourth exception requires Canada to repeal the sections of the Income Tax Act that require magazines and newspapers to be printed or typeset in Canada in order for advertisers to qualify for tax deductions. As a result, businesses would be able to deduct advertising expenses on publications printed in the United States, but only if the periodicals met Canadian-content rules.

Further protection for cultural enterprises is provided by their exemption from Article 2011, the Nullification and Impairment article. That sets out the procedures by which either country could initiate a dispute when it felt “any benefit reasonably expected” had been blocked by the other nation. This exemption would leave the United States with one residual right of tit-for-tat response to Canadian cultural laws. Article 2005.2 says that either country may take “measures of equivalent commercial effect” to counter actions that would have been considered illegal under the accord if the cultural industries exemption had not been in place.

I Chapter 21, the last chapter of the agreement, contains the articles for the initi£ ation and termination of the I agreement. The two govern| ments agree to exchange and I publish all information necessary for the administration of irritant the treaty. The accord may be amended at any time by

mutual consent. It is scheduled to come into force on Jan. 1, 1989, “upon an exchange of diplomatic notes,” and would remain in effect, “unless terminated by either Party upon sixmonth notice to the other Party.”

AN ISSUE THAT FLOWED

For months, critics of the agreement have insisted that it would allow the export of Canada’s water during a crisis in the United States. For months, the proponents of the bill have denied the allegation. The only direct reference to water in the four-volume free trade agreement comes in one item among 1,092 pages of tariff schedules governing the classification duties on hundreds of “goods.” Those tariffs are the duties that governments impose on imports to protect specific domestic products. Item 22.01 states: “Waters, including natural or artificial mineral waters and aerated waters, not containing added sugar or other sweetening matter nor flavored; ice and snow.” If implemented, the item stipulates that, over a 10-year period, the United States would remove a customs duty of four-tenths of a cent on each litre of Canadian mineral and carbonated water.

In turn, Canada would abolish a 10.2-percent duty on “other” U.S. water imports. In interviews, federal trade experts defined “other” as a blanket water category that could include everything from water in tankers to bottled U.S. water.

Although water is not mentioned in the actual text of the agreement, the tariff item has prompted many serious questions. Is water in the ground also a “good” under the terms of the treaty? The concern arises because the agreement says that the two parties could not restrict the export of a “good.” But most Canadian experts on the agreement contend that water in the ground is not a “good.” And in an attempt to ensure that the treaty provisions on “goods” do not apply to water in the ground, the Conservative government added a clause to Bill C130, the legislation implementing the treaty. But the legislation died on the Commons order paper when the election was called.

The amendment to Bill C-130 sought to exempt “water” defined as “natural surface and ground water in liquid, gaseous or solid state.” That clause sought to establish that controversial sections of the free trade agreement, such as the definition of “goods,” would not apply to water on the ground. The C-130 amendment added that other sections of the treaty do apply to water “packaged as a beverage or in tanks.” Still, many free trade critics maintain that ground water can be exported.

BATTLE LINES ON THE GUT ISSUE

Tablets of stone from 23 prominent spokesmen on the fundamental election issue of free trade

Because of Canada’s huge size, sparse population and regional diversity, it is rare for a single issue to galvanize Canadians from coast to coast. It happened in 1972, when Canada came perilously dose to losing an eight-game hockey series against the Soviet Union. It happened again in 1982, when Pierre Trudeau’s Liberals patriated the Constitution. And it is happening now as Canadians contemplate free trade with the United States, an idea that is older than the country itself—and just as durable.

Although free trade has divided Canadians, the adversaries share one laudable goal: a deep commitment to building a better country. Maclean’s has chosen some of the most provocative and articulate comments from the debate-.

Ronald Reagan, U. S. President (for)-. “After the Allied victory over the Axis powers, America and Canada combined their efforts to help restore Europe to economic health. Those were golden years of economic co-operation that saw the creation of the General Agreement on Tariffs and Trade, which knocked down the tariff barriers that had so damaged the world economy; the International Monetary Fund; and the creation of the European Common Market. The theme that ran through it all was free and fair trade. Free and fair trade was the lifeblood of a reinvigorated Europe, a revitalized free world that saw a generation of growth unparalleled in history.

“We must keep these principles in mind as we move forward on Prime Minister Mulroney’s free trade proposal, a proposal that, I am convinced, will prove no less historic. Already, our two nations generate the world’s largest volume of trade. This two-way traffic in trade and investment has helped to create new jobs by the millions, expand opportunity for both our people, and augment the prosperity of both our nations.”

Brian Mulroney, Prime Minister (for): “Canada can and does excel, given the opportunity to do so. That is why we stand for an expansionary trade policy, founded on free trade with the biggest market in the world.

“Second, more trade means more jobs, and a strong economy is the guarantee of a distinctly Canadian program in health care, education, social services and environment. It is the new pool of wealth that is going to enable us to do more for the elderly and the disabled.

“Continued economic growth lets us ensure literacy and training and affirmative action programs.”

John Turner, Liberal leader (against): “We want the system to be fairer. The Mulroney trade deal threatens our ability to do that. Without ultimate control over our economic, social, cultural and regional-development policies, we are less of a nation and we are less able to meet the needs of our own population in our own way.

“I will not let Brian Mulroney sell out our sovereignty. I will not let this great nation surrender its birthright. I will not let Brian Mulroney destroy a 120-year-old dream called Canada.”

Edward Broadbent, NDP leader (against): “I understand Brian Mulroney likes to play poker. But it’s not appropriate to gamble with the fete of our nation, with the fete of our traditions, with our social programs. Brian Mulroney had no right to gamble away the future of Canada.”

Margaret Atwood, poet, novelist and critic (against): “This deal severely limits our power to introduce any new initiatives on the cultural front. It gives us not more freedom of movement, but much less.

“Our national animal is the beaver, noted for its industry and co-operative spirit. In medieval bestiaries, it is also noted for its habit, when frightened, of biting off its own testicles and offering them to its pursuer. I hope we are not succumbing to some form of that impulse.”

Allan Gotlieb, Canadian ambassador to the United States (for): “There is no sign anywhere that the Americans see a trade agreement as a means to swallow Canada up at last. That is a Canadian myth.

“The United States is a pluralistic, competitive, confrontational, litigious, turbulent society, almost totally absorbed in the extraordinarily difficult task of governing itself. Americans have little time and less inclination to look northward at all, let alone with manifest destiny on their minds. We would be foolhardy to ignore U.S. power. But we would be foolish to allow myths about our vulnerability to obscure our vision, to discount our prospects.”

Robert White, president, Canadian Auto Workers (against): “No matter how much the government tries to obscure and confuse the issue, the fact is that the tariffs on Canada-U.S. trade will be phased out over the next 10 years. The ‘safeguards’ [in the Auto Pact] will therefore be reduced to ‘guidelines’ with no penalty, no enforcement mechanism. Furthermore, our hands are tied in terms of any future traderelated auto policy. But in an industry so important to our manufacturing base, which remains foreign-dominated and vulnerable to international trends, it is unforgivable to surrender the policy footholds we have, to lose absolutely vital investments of future policy, and leave the future to the uncertainties of market forces and unilateral corporate decisions.”

John Crispo, Toronto economist (for): “Many Canadians have been misled into believing that the real choice is between free trade and the status quo. This deception helps to explain the complacency and smugness that characterizes much of the reaction to free trade that one finds, particularly in southern Ontario. Given the boom in that part of the country it is hard for people there to believe that there is any need for change.”

Julia Langer, executive director of Friends of the Earth (against): “The deal clearly facilitates the southward flow of Canada’s natural resources and does not even mention the fate of environmental regulatory programs, pollution control laws or public participation in local, regional and national environmental decisionmaking. Can we assume the environment will be protected? Probably not.”

George Bonar, chairman of Eldorado Nuclear Ltd. (for): “Saskatchewan will be a major beneficiary, given the increasing role of its uranium mines in the U.S. supply picture during the 1980s. This is particularly encouraging for uranium investment prospects in the province. The pact appears to be capable of dealing with protectionist forces in the U.S. uranium industry and Congress, which threaten onethird of Canada’s production.”

Marjorie Bowker, former Alberta family court judge (against): “I favor freer trade but not this free trade agreement. The cost of securing the remaining 20 per cent of our trade with the United States is unreasonable and excessive. With the apparent decline of the United States as the world economic leader, and the rise of Asian-Pacific countries as the future zone of expanding world trade, a better option for Canada is to develop multinational trade relationships, especially with countries in the Pacific.

“Countervailing duties, which are the greatest barrier to free trade, will not be eliminated by the agreement. ”

Emmett Hall, retired justice of the Supreme Court of Canada (for): “I’m here to tell you there is nothing in this agreement damaging to medicare in Canada.”

Mel Hurtig, publisher and cofounder of The Council of Canadians (against)-. “I can say without the slightest bit of rhetoric that there will not be a Canada a generation from now if this agreement is allowed to proceed.”

Thomas d’Aquino, president of the Business Council on National Issues (for): “Canadians export more per citizen than the people of any other industrial nation. More than 30 per cent of our national income is generated by exports. More than three million jobs—greater than one-quarter of our workforce—depend on export trade. Of this trade, the United States absorbs almost 80 per cent. This southward flow of our commerce provides jobs to more than two million Canadians.

“We don’t always appreciate the critical link between trade and the growth of jobs. Since the Second World War, the value of our exports has increased more than twelvefold. During this period, we achieved extraordinary economic growth at the same time that barriers to trade were being lowered throughout the industrialized world. Exports have built our nation. Exports have provided us with one of the highest standards of living in the world.”

Maude Barlow, chairman, The Council of Canadians (against): “Make no mistake. We cannot integrate our two economic systems and leave our social systems different. Eventually, they will become similar, and because no standards were set, and because we are dealing with a country so much bigger, their standards will prevail.”

Barbara McDougall, minister responsible for the status of women (for): “There is a lot of fear-mongering. Under free trade, it will cost less to outfit a house and it will increase our national wealth. Our social programs are not at risk.”

David Peterson, Ontario premier (against): “I think we frankly got snookered on the deal. I think we’ve given away far more than we’ve got, and I think we’ll regret it.”

Richard Lipsey and Robert York, analysts with the Toronto-based C. D. Howe Institute, in the institute’s Trade Monitor (for):

Simon Reisman, free trade negotiator Louis Laberge, president of the Quebec (for): “Let's get it straight. Those who Federation of Labor (against): “We are oppose free trade should base their objecconvinced that thousands and thousands of tions on facts, not misconceptions.” jobs will be lost.”

“Whatever its shortcomings, the agreement provides for a major liberalization of trade and for the removal of many trade irritants. It increases access in 18 identifiable ways, running from the complete removal of tariffs on all trade in goods, to the easing of border crossings for business and service personnel, whose frequent harassment at the border is a significant nontariff barrier.

“On grounds of access to the U.S. market for Canadian exporters, the agreement must be regarded as a major success. Everyone would have liked more. But the agreement offers more in one fell swoop than any of the world’s many regional trade agreements have managed to develop over several decades.”

Harrison McCain, chairman, McCain Foods Ltd. (against): “Canadian farmers absolutely cannot supply the food-processing industry with milk, cheese, poultry, eggs, tomatoes and other vegetables at competitive prices comparable to those in the United States and without damage to themselves. And Canadian processors are not allowed to buy those ingredients in the U.S.”

Thomas Courchene, director of the school of policy studies at Kingston, Ont. ’s Queen ’s University (for): “The free trade agreement provides that, over the next five to seven years, both countries will attempt to develop a mutually acceptable set of rules relating to subsidies and other anticompetitive measures. The prevailing wisdom in Canada is that this will constrain Canada more than it will the United States. The opposite is far closer to the truth.

“If, as I suspect, Canada’s new initiatives on the regional-policy front will be more successful than its past forays in this area, Canadians may be quite prepared to agree to such a subsidy pact, since these new regional initiatives represent a movement away from measures that are countervailable to those that inherently are not.

“In contrast, a number of U.S. states have, over the period of the 1980s, suddenly discovered regional-development initiatives in the wake of the rust-belt-to-sun-belt shift so that they are likely to be much more difficult to bring into line. Therefore, it is the United States, not Canada, that will probably be the stumbling block on the subsidy code. Advantage: Canada.”