COVER

WINNING THE TRADE BATTLE

THE ECONOMIC INTEGRATION OF CANADA AND THE UNITED STATES IS WELL ON ITS WAY

D’ARCY JENISH September 19 1988
COVER

WINNING THE TRADE BATTLE

THE ECONOMIC INTEGRATION OF CANADA AND THE UNITED STATES IS WELL ON ITS WAY

D’ARCY JENISH September 19 1988

WINNING THE TRADE BATTLE

THE ECONOMIC INTEGRATION OF CANADA AND THE UNITED STATES IS WELL ON ITS WAY

COVER

Allan Schmidt, vice-president of a tiny Niagara Peninsula winery, says that he had good reason to worry about the future of his company. Canada and the United States had just reached agreement on a free trade accord last October, and 26-year-old Schmidt anticipated that a sharp reduction in the tariffs, which had long protected wine makers, would trigger a deluge of cheap imports. But rather than meekly accepting defeat, Schmidt launched a sales campaign in the United States. After holding wine tastings with distributors in New York City, Boston and Philadelphia during the first six months of this year, Schmidt had sold 800 cases of his company’s finest white

wine. And his Vineland Estate Wines Ltd. hopes to sell one-quarter of its 1989 production to American distributors. He declared, “If people had done their homework,

Canadian wine makers could have been down there a lot sooner.” Canadian exports of wine are rare, but thousands of other Canadian companies are already selling everything from wild rice to street sweepers to modular homes in the United States.

As the debate over free trade rages across Canada, many firms are expanding their exports to the United States (page 38). Over the past 10 years, Canadian firms have become major investors south of the border, leading some experts to predict that, by 1991, Canadian-owned assets in the United States will exceed the value of American-owned assets in Canada. But the economic ties between the two countries go well beyond trade and investment. Businessmen from Montreal and Vancouver now commute to work in upper New York state and Washington state respectively. And upstate New Yorkers frequently drive to Montreal for convenient flights to New York City. In an average year, Canadians and Americans cross the border between their countries about 140 million times. Said David Sacks, president of the Montrealbased Seagram Company Ltd.: “I don’t treat the border between Canada and the United States as a very serious one.”

Some economists contend that, without a free trade agreement, Canada and the United States have already reached a level of economic integration exceeding even the European Community countries, which

plan on full economic union by 1992. Experts also say that the agreement will not lead to fundamental change but will formalize a revolution that has already happened. Stephen Blank, director of the Institute for U.S.-Canada Business Studies at New York’s Pace University, said, “We have two independent countries with distinct cultures sharing one economy.”

John Bulloch, president of the 80,000-member Canadian Federation of Independent Business, says that since these fundamental changes have already occurred, both supporters and opponents of the agreement have overdramatized its potential impact. Michael Robinson, a trade lawyer with the Toronto law firm Fasken Martineau Walker, added that the creation of bilateral panels to resolve trade disputes between the two countries would be a major victory for Canada. The panels will investigate and make binding decisions involving such trade disputes as the use of unfair subsidies. Said Robinson: “For the Americans to say that their Supreme Court will not be the final court of appeal was a huge concession.” Despite such widely expressed enthusiasm, the federal opposition parties continue to denounce the agreement, in part because they believe it encompasses far more than trade yet does not guarantee Canadian access to the U.S. market. In his final Commons speech on the accord, Liberal Leader John Turner said that the agreement would cost Canada “our sovereignty, our freedom to make our own choices,

to decide what is right for us, to go on building the kind of country we want.” New Democratic Party Leader Edward Broadbent added that the deal “does not protect our water or our regional development programs; [it] gives away control of our energy, puts in jeopardy our social programs and ignores the claims of Canadian culture.”

Arts and culture organizations have also remained steadfastly opposed to parts of the agreement, despite government assurances that they will be exempt from its provisions (page 37). In order to emphasize their opposition, 15 different organizations representing the film, television, publishing and recording industries formed the Cultural Industries Alliance. On July 28, the alliance released a statement that said the federal government has already made changes in cultural policy over the past 18 months that reflect the influence of the free trade agreement. Said author Margaret Atwood, an outspoken opponent of the deal: “Nothing can alter the fact that this is not an agreement among equals like the European Common Market.”

Most members of the business community support the Conservatives on free trade, and cultural nationalists have lined up behind the federal opposition parties, but other Canadians appear to be divided. Donna Dasko, vice-president of Toronto-based Environics Research

Group Ltd., said that her company’s latest public opinion poll, conducted in June, showed that 38 per cent of respondents favor the agreement, 40 per cent oppose it and 22 per cent are undecided (page 36). Dasko added that Environics polls have also revealed that Canadians are aware of the importance of foreign trade, which has forced the opposition parties to produce policy alternatives. “They realize that it is not enough to say no, no, no.”

Although there are no guarantees that the agreement will be ratified, trade lawyers, management consultants, customs experts and accountants are already advising clients on how they should prepare for free trade. Pierre Pettigrew, director of international marketing with Samson Belair, a Montreal management consulting firm, said that he has developed 15 different strategies to assist clients.

David Powell, a partner in Fasken Martineau Walker’s Montreal office, said that his firm has prepared a checklist of 21 questions that senior executives should ask themselves to determine whether they are prepared for free trade. It is expected to be distributed to 8,000 Quebec companies in the next month and it may be circulated in Ontario as well.

If the free trade agreement takes effect, the potential exists for a huge increase in two-way trade between Canada and the United States. Michael Hart, a former senior civil servant who

CANADA-U.S. TRADE IS BALLOONING EVEN WITHOUT A FORMAL AGREEMENT

helped negotiate the trade deal, said that about 70 per cent of Canada-U.S. trade is already tariff-free, while other estimates run as high as 84 per cent. But Canada and the United States still impose tariffs on thousands of items, said Hart.

Other analysts foresee less tangible but equally significant changes as a result of the accord. Anna Guthrie, economist with the Toronto-based brokerage firm Loewen, Ondaatje, McCutcheon & Company Ltd., said that exposing the Canadian business community to American competition could create a larger pool of managers and more Canadian-based worldscale companies.

But for companies currently serving only the domestic market, free trade will require major adjustments. Michel David, a partner with the Montreal office of Coopers & Lybrand, an accounting and consulting firm, said that the creation of one enormous North American market will force Canadian manufacturers to become much more specialized rather than being low-volume producers of a broad range of goods. That trend has already begun. Kenneth Hardy, a marketing professor at the University of Western Ontario in London, said that he s conducted a survey in 1986 that showed 3,000 smallto medium-sized Ontario manufacturers, % or 20 per cent of the total, were already ° exporting to the United States. Hardy added that those companies succeeded by developing highly specialized products.

Until new definitions and rules are negotiated, a bilateral tribunal will be the ultimate forum for resolving trade disputes. Contrary to the assertions of the federal opposition parties, most trade experts say that the creation of the panels will be a major benefit to Canada. Robin-

son said that he has compared dispute settlement mechanisms in eight other trade or economic co-operation treaties. He added that the Canada-U.S. arrangement will be superior to any of the others because it would be the only

body that can reach legally binding decisions, which are then enforceable through the courts. Robinson said that this means all decisions by the dispute panel are “final and binding” and cannot be overturned by any government agency, including the U.S. Congress. He added that this is unlike the Europe-

an Community, which leaves the negotiation of major trade disputes to a body that can only propose recommendations. Debra Steger, an international trade lawyer with the Torontobased law firm Fraser & Beatty, said that an impartial panel is extremely important to Canadian companies because they are much more dependent upon export sales than their American competitors, who can comfortably rely on their own huge domestic market. Said Steger: “It is a major accomplishment to get the Americans to accept the

authority of any international body.”

While Canadians grapple with the issue of free trade and its implications for national sovereignty, a similar debate is raging within the 12-member European Community. And at the same time, politicians in Japan are debating how that Asian country would be linked to a Canada-U.S. free trade deal (page 40). The European Community has set 1992 as a deadline for achieving full economic union through the removal of all trade barriers. In July, Jacques Delors, the French president of the community’s executive wing, said that within the next decade at least 80 per cent of all decisions involving the European Community now taken by national governments will be made by the community. Delors's candor drew a sharp rebuke from British Prime Minister Margaret Thatcher, who described the idea as “preposterous and frightening.” In all probability, Canadians will have a chance to render a judgment on the Canada-U.S. free trade agreement this fall. Before election day, they will be bombarded with two sharply conflicting views of the future under a free trade agreement. But many of Canada’s leading businessmen and economists believe that the revolution has already occurred and that the accord itself is an attempt to catch up.

D’ARCY JENISH