BUSINESS

STOKING UP TRADE

D’ARCY JENISH December 5 1988
BUSINESS

STOKING UP TRADE

D’ARCY JENISH December 5 1988

STOKING UP TRADE

BUSINESS

For Canada’s business community, the election outcome promoted more jubilation than usual. After one of the most bitterly contested federal elections in decades, business leaders optimistically trumpeted the anticipated benefits of free trade with the United States: increased sales, revenues and profits and less harassment from protectionist U.S. congressmen and lobby groups. After soaring to its highest level in almost seven years last week, the Canadian dollar closed the week at 83.93 cents (U.S.), compared with 81.27 a week ago. But two days after the election, American-owned Gillette Canada Inc. announced it will close plants in Montreal and Toronto, leaving 600 people jobless. Although the company maintained that the closures are part of a worldwide reorganization, Canadian nationalists charged that Gillette’s departure is just the start of an American exodus from Canada under free trade. And the Ottawa-based Council of Canadians, a coalition of anti-free-trade groups, called for a boycott of Gillette products.

While the uproar over the Gillette closures illustrated the intensity of the free trade issue in Canada, most business leaders admitted last week that the economic benefits of the agree-

THE FREE TRADE DEBATE RAGES ON IN THE WAKE OF THE DECISIVE CONSERVATIVE ELECTION VICTORY

ment will occur gradually over a period of several years. They pointed out that tariff and nontariff barriers will be reduced or eliminated in phases and that further negotiation will be required to deal with controversial issues such as regional subsidies, agricultural standards and trade in services. U.S. experts in international trade expressed similar sentiments but warned that tough negotiations lay ahead for both countries. Said Washington-based trade lawyer Stewart Baker: “What we have now is a good framework for free trade.”

While Canadian businessmen plot their free

trade strategies over the next several months, trade officials in both governments will be preoccupied with setting up the numerous committees and working groups required to implement the agreement. As well, Canadian and American trade negotiators will be attempting to use their bilateral agreement to stimulate the current negotiations under the General Agreement on Tariffs and Trade (GATT). Said Michael Aho, a foreign trade specialist with the New York City-based Council on Foreign Relations: “Canada has struck a blow for trade liberalization and for consumers everywhere.”

The election outcome serves as a prelude to a major meeting of the 96 member nations of GATT in Montreal starting on Dec. 5, which has been called to review the progress made so far in the latest round of negotiations to lower trade barriers worldwide. Federal government officials estimate that close to 1,000 delegates, including 50 to 60 trade ministers, from at least 90 GATT nations will attend the four-day meeting. A spokesman for the multilateral trade negotiations office in Ottawa said that the Canada-U.S. free trade agreement is unlikely to become a precise model for a multilateral agreement. But it will send a powerful signal to

GATT members that progress can be made on such contentious issues as dispute-settlement tribunals and tariff reductions.

Besides conducting multilateral negotiations through the GATT, the federal government will also continue talking with the United States as prescribed by the free trade agreement. In fact, Washington-based trade lawyer Baker told Maclean ’s that, despite the uproar over the deal in Canada, it is “only the barest beginnings of a free trade agreement.” Baker added that Canadian and U.S. negotiators set aside some of the toughest subjects in order to reach an overall agreement. As a result, the agreement calls for the establishment of a working group to develop an extensive new set of rules and interpretations on such matters as government subsidies.

It also provides for eight different bilateral committees to harmonize agricultural technical standards. The two governments have agreed to set up joint committees for further negotiations on government procurement, nonagricultural technical standards and trade in services including tourism and architecture. They will also form a select panel of auto-

industry experts who will provide advice on automotive policy.

Even without those future negotiations, the business communities in both countries will experience immediate changes in the government policies and regulatory regimes affecting them. By Jan. 1,1989, Canada and the United States will have adopted a new harmonized system of tariff schedules developed as a result of an agreement reached during the Tokyo round of GATT negotiations that concluded in 1979. Gordon Ritchie, Canada’s former deputy chief negotiator in the free trade talks, said that in some cases the new schedules contain up to 800 items under one type

of product compared with only 100 items under the old schedules. The goods range from paints and furniture to pleasure craft and vending machines. As a result, customs officials will have much less discretion when applying tariffs.

Besides adopting new tariff schedules, both governments will be changing dozens of policies, regulations and administrative practices in order to comply with the trade agreement. Richard Dearden, an international trade lawyer with Toronto-based Gowling and Henderson, said that U.S. trade representative Clayton Yeutter now has his firm’s submission on changes that will be necessary in Canadian regulations because of the trade act. Yeutter was scheduled to file it with Congress by Nov. 27. Dearden said that among the dozens of pending changes would be a lowering of the threshold for public tendering of government contracts. The GATT code stipulates that a contract worth more than $220,000 must be open for public bids, but the free trade agreement lowers that threshold to $25,000 (U.S.). A federal government source said that the Canadian government hired three Washington-

based law firms to conduct a similar review of American regulations. Their findings were tabled in the House of Commons last June when the government introduced Bill C-130, the legislation to implement the agreement in Canada.

Several Canadian firms are already calculating the potential benefits. James Butler, president of Calgary-based Nova Corp., said that a 12.5per-cent U.S. tariff on polyethylene pellets, a petrochemical product used in the manufacture of plastics, will be eliminated over five years. Butler predicted that Nova’s profits should increase by $15 million annually starting in 1989. Similarly, John Risley, president of Halifax-

based Clearwater Fine Foods Inc., said that the phased elimination of U.S. tariffs on processed seafood, which range from 15 to 35 per cent, will allow his company to expand its processing capacity in Canada. Because of quotas limiting the size of each company’s catch, secondary processing is the only avenue for growth in Canadian revenues. But the removal of U.S. tariffs will mean that Clearwater, which shipped unprocessed fish to the United States to avoid high tariffs, could now expand its Canadian processing facilities and ship much more manufactured and highvalue product into the vast American market.

Whatever the outcome of S the controversy over the Gil^ lette closures, some observers predict that it is a taste of 3things to come: that every § time a plant closes or a busi5 ness fails, someone will blame free trade. Similarly, the government and its supporters will try to credit free trade for positive economic developments. But, according to international trade experts and many business leaders, the changes wrought by free trade will be evolutionary, rather than revolutionary.

Among Canadian clothing manufacturers, there is scarcely a hint of optimism as they contemplate free trade. Last January, the board of directors of the Canadian Apparel Manufacturers Institute predicted that close to half of the 120,000 jobs in the industry could be wiped out as a result of the free trade agreement.

As well, Peter Nygard, president of Torontobased Nygard International Inc., said that restrictions on the use of fabric from third countries will create an administrative nightmare. Said Nygard: “There will be an arsenal of paperwork.” Canadian wine-makers are preparing for an equally grim future under free trade. Provincial liquor boards across Canada, except in the three Prairie provinces, have protected domestic wine-makers by signifi-

cantly marking up the prices of foreign wines. Quebec, British Columbia, Nova Scotia and New Brunswick will phase out the price markups over a seven-year period, said Newman Smith, executive vice-president of Andrés Wines Ltd. in Winona, Ont. Said Smith: “It’s definitely going to hurt our sales.”

But free trade will make certain parts of the country more attractive to foreign investors. James Matkin, president of the Business Council of British Columbia, said that during the federal election, investors from Hong Kong, Japan, South Korea, Australia and New Zealand informed the council that they would be much more interested in British Columbia if the trade deal were accepted.

Although the treaty will not formally take

effect until at least Jan. 1, 1989, opponents were quick to blame free trade last week for the Gillette closures. The plants’ 600 employees produce razor blades, disposable razors and Paper Mate pens. Shirley Carr, president of the Canadian Labor Congress, and Liberal trade critic Lloyd Axworthy both said that the closures were a direct result of free trade. But Ronald Rossi, Boston-based president of Gillette’s North American blade and razor division, denied any connection between the closures and free trade. He noted that the company has cut its worldwide workforce by 3,000—to about 28,000—since 1987 as part of a general reorganization. Rossi added that Gillette has closed plants in America, Argentina, Brazil, Britain and Australia.

D’ARCY JENISH

JOHN DALY

HAL QUINN

WILLIAM LOWTHER