SPECIAL REPORT

A FREE TRADE ANNIVERSARY

From 1989: A year after the Canada-U.S. free trade accord, trade is growing, but critics say jobs are being lost

TOM FENNELL December 18 1989
SPECIAL REPORT

A FREE TRADE ANNIVERSARY

From 1989: A year after the Canada-U.S. free trade accord, trade is growing, but critics say jobs are being lost

TOM FENNELL December 18 1989

Throughout last fall’s raucous seven-week federal election campaign, there was one dominant issue—the Canada-U.S. Free Trade Agreement. And one issue in that emotional campaign soared above all others: Would an agreement with the United States that removed all protective tariffs lead to widespread layoffs and ultimately shatter Canada’s identity as a nation? On election day, the country voted decisively in favor of the Mulroney government, saying yes to its free trade initiative. But now, nearly a year after the deal was implemented, a Maclean’s/Decima poll has found that the nation is deeply pessimistic about the accord, with 52 per cent of respondents saying that they believe the pact should not have been signed. And this week, a contentious new set of follow-up trade policy discussions are beginning in Ottawa. At issue—federal subsidies to industry— the critical concern that almost killed the free trade negotiations in 1988. 

Capture: The fear captured in the Maclean’s/Decima survey—a poll of 1,500 Canadians taken from Nov. 1 to 8, accurate within plus or minus three percentage points 19 times out of 20—seemed all too close to reality, as layoff notices went up in factories across Canada. And by the end of last week, free trade critics were blaming the agreement for the loss of 33,000 jobs since January and almost 5,000 jobs in just a single week late last month. And like the rage expressed over the job losses, the new free trade issues that will dominate 1990 and 1991, ranging from the role of federal subsidies to the arts to regional development funding, are just as emotional and politically charged.

In fact, Maclean’s has learned that Ottawa considers the outcome of new rounds of trade discussions with the United States over the next two years so critical that both International Trade Minister John Crosbie and Agriculture Minister Donald Mazankowski have sent teams of experts to the United States, where they are gathering evidence on U.S. subsidies to industries and will later use the findings to strengthen the Canadian negotiating position. As well, Maclean’s has learned that U.S. negotiators will officially take the position that Canada extensively subsidizes industry while Americans do not, leading to a potential early showdown on the issue. Said Allan Gotlieb, the former Canadian ambassador to Washington: “During the free trade negotiations, they were not at all anxious to put their subsidies on the table. So the problems are not just on the Canadian side.”

Turbulent: Despite the turbulent outlook for the FTA in its second year, the past year has seen one of its prime objectives fulfilled. Trade flows between the United States and Canada are up, and forecasts for 1990 growth in commerce between the two countries, the world’s largest bilateral trading partnership, are bright. The combined value of exports and imports between Canada and the United States is estimated by Infometrica Inc., an Ottawa-based economic forecasting company, to grow by 9.7 per cent in 1990, compared with an average 2.3-per-cent growth rate three years before the Free Trade Agreement was signed. As cross-border trade booms, U.S. and Canadian firms are continuing to expand in both countries. And many Canadian firms, such as clothing manufacturers, which analysts predicted would be killed by free trade, have forged successful survival strategies.

Still, free trade critics, led by the Canadian Labour Congress, which continuously analyses the effects of the agreement, adamantly oppose the FTA. They claim that the accord is costing Canadian jobs as U.S. parent companies shut down or relocate subsidiaries to the United States. And they say that, despite the lowering of tariffs, Canadian consumers have not benefited from free trade and, in fact, are crossing the border in record numbers to purchase cheaper U.S. products. As well, they charge that, under the free trade pact, the sell-off of Canada’s vital energy resources has increased alarmingly. Critics also say that the crucial mechanisms that the agreement put into place to settle trading disagreements— the disputes settlement panels—have failed their first major test.

The Maclean’s/Decima poll showed that, while free trade is no longer a major concern for Canadians, 55 per cent said that the FTA had led directly to job losses. Declared Council of Canadians chairman Maude Barlow, a Liberal and outspoken FTA critic: “The outflow of business has been phenomenal, and nobody is keeping track of that.”

Clearly, despite the charges and counter-charges over free trade’s impact so far, the most contentious commercial issue facing Canada in 1990 and beyond will be the explosive subsidies matter. During the trade negotiations in 1988, officials set aside the highly charged issue of which subsidies should be allowed under the agreement. But now, it is being reopened on two fronts. This week in Ottawa, Agriculture Minister Mazankowski will meet with his provincial counterparts and farm groups to wrestle with the economically and emotionally wrenching issue of cutting back agricultural subsidies and farm marketing boards, which regulate commodities such as milk, wheat and eggs. Said Mazankowski: “We will be prepared to make some sacrifices if [our trading partners] will.”

Aiming: The discussions in Ottawa were conducted in relation to the General Agreement on Tariffs and Trade (GATT), a multilateral treaty aiming to liberalize world trade, and the desire to see the $250-billion subsidy that is now being paid to international agriculture cut back. But critics, such as Liberal agriculture spokesman Maurice Foster, say that GATT and the FTA are inextricably linked in the matter of the Canadian government’s new agriculture policy, and the cutbacks will be extremely harmful. Said Foster: “Things are being thrown wide open, and many farmers are shell-shocked. They don’t know what’s hit them or what’s coming next.”

The subsidy cuts could split agriculture along regional lines. Western grain farmers and beef producers say they welcome the prospect of a more subsidy-free international marketplace, but about 46,000 dairy, poultry and pork producers in Central Canada say that they are deeply concerned about the potential loss of subsidies. That was the message 5,000 protesting Quebèc and Ontario dairy, pork and poultry farmers took to Ottawa on Nov. 21. Said Brigid Pyke, president of the Ontario Federation of Agriculture: “Farmers across the country are extremely anxious that what we have struggled to put together for decades is being systematically dismantled.”

Battle: The battle on the second trade front officially began in Washington on Nov. 15, when Canada’s chairman of the Subsidies and Trade Remedies Working Group, Anthony Halliday—a 54-year-old career diplomat who served as minister-counsellor at the Canadian Embassy in Washington from 1976 to 1979 and Canada’s consul general in Chicago from 1985 to May, 1989—opened discussions with. his U.S. counterpart, Ann Hughes, on the subsidy issues.

Both are career bureaucrats with extensive backgrounds in international trade. And their appointment, say many analysts, illustrates just how volatile the unresolved subsidy issues really are. Neither government, they say, wanted to risk naming a high-profile political appointee, like Canada’s former trade ambassador, Simon Reisman, because the risk of failure is too great.

Just how intense the pressure on Halliday will be became apparent even before the negotiations began. Last month, he weathered a barrage of questions from members of the House of Commons standing committee on external affairs. Throughout his 1 1/2-hour-long presentation, MPs pointedly asked him what existing subsidies the Conservative government planned to negotiate away in the attempt to reach an agreement, one that must be concluded by Dec. 31, 1995.

Currently, the commerce department cites Canadian government subsidies as the main reason it imposed sweeping, punitive tariff action, or countervails, against a number of Canadian companies and is now taking aim at Canada’s durum wheat producers.

The U.S. countervail actions are clearly focused on a key element of long-standing Canadian economic policy—the use of government aid to support major industries, especially in disadvantaged areas. In one action involving Canada’s pork industry, the commerce department ruled that the Canadian industry benefited from Canadian subsidies. As a result, an eight-cents-per-kilogram countervailing duty was imposed on fresh, chilled and frozen Canadian pork earlier this year.

Strong: In the wheat case, the commerce department action is based on claims that Canada’s government-subsidized rail-transportation system unfairly aids Canadian farmers. Said Earl Fry, a political science professor who teaches Canadian Studies at Brigham Young University in Provo, Utah: “There are strong indications that Americans are increasingly demanding the means to defend themselves from the discriminatory practices of other nations. If you’re Canada— which has three-quarters of its eggs in the -American basket—you’re the No. 1 potential victim of such thinking.”

There is, in fact, evidence that U.S. negotiators are aware that their government, too, provides subsidies. In an original draft paper released in August, William Cavitt, director of the commerce department’s Office of Canada, acknowledged: “Our [subsidy] programs are less visible than those in Canada, but the benefits are no less real.”

However, the department quickly retracted Cavitt’s admission and replaced his paper with a new, weaker version, which was presented to Halliday when he was in Washington on Nov. 15. Said Stephen Jacobs, deputy director of the Office of Canada: “As far as we are concerned, [the original paper] does not exist.” If Canadian negotiators cannot convince their U.S. counterparts that the U.S. subsidies “do exist,” some free trade strategists suggest that Canada step up its campaign by urging Canadians to file for countervail actions of their own. Said Washington-based trade lawyer Gary Horlick: “What Canada has to do is launch more countervails of its own against the United States. That is the only way they are going to get the attention of both American politicians and business people. It certainly might provide some shock value.”

Ruling: As the debate on subsidies and countervail action intensifies, the dispute settlement panels set up by the agreement will come under increasing pressure. The five-member panels are designed methodically, and categorically, to solve contentious trade issues between the two trading partners. But, as indicated by an October ruling on the first case brought before a panel—a three-year-old West Coast salmon and herring landing requirements dispute—the mechanisms may be ineffectual. In that case, the panel ruled that the 100-per-cent requirement contravened the FTA, but that a landing requirement of 80 per cent to 90 per cent of the catch could be within FTA and GATT guidelines. But both governments are now interpreting the ruling differently, sending the whole issue back into the potentially explosive political arena, allowing governments to retaliate with punitive tariffs.

Canadian trade officials say that the ruling upheld Canada’s right to require that up to 80 or 90 per cent of all salmon and herring caught in Canadian waters has to be landed and inspected in British Columbia as a conservation measure. But U.S. officials have claimed for three years that Canada has no right to force any landing requirements and that it is an unfair tactic to ensure that the fish are processed in British Columbia rather than in the United States. As a result, U.S. officials say the ruling specifies that the landing requirement contravened the FTA. Spokesmen for the industries affected on both sides of the border said they were unhappy with the recommendations. Declared Robert Morley, executive director of the Fisheries Council of British Columbia, an association that represents three-quarters of the province’s fish-processing industry: “The report satisfies no one. It is a failure.”

Extremely: As a result of the disagreement, the issue has to be resolved by Trade Minister Crosbie and U.S. Trade Representative Carla Hills. But in their meetings in Ottawa in late November, they failed to resolve the conflict. Still, Crosbie said he was “extremely satisfied” with the dispute-settlement mechanism, and Hills added, “It is remarkable how well it is working and what few disputes we have.” Other disputes that will soon be referred to dispute panels are a Canadian tariff on U.S. plywood that this country maintains is of substandard quality, and a U.S. threat to place a minimum-size restriction on Canadian lobsters, which will have a decided impact on the East Coast fishing industry.

And others maintain that the dispute mechanism will yet prove to be a valuable forum for resolving and defusing politicized trade disputes in the future. “This case [salmon] was probably the toughest you could get,” said Robert Johnstone, executive director of the Ontario Centre for International Business. Said Johnstone, also one of 25 people who have been chosen to be members of Canada’s dispute panels: “Fish issues are extremely sensitive and highly political, yet some movement was made. The panels are going to play a useful role.” Added Fry: “What we saw here was an effort by both sides to be fair. I am encouraged about future negotiations.”

In assessing the overall impact of the FTA, Derek Burney, who helped negotiate it and whose current position—as Canada’s ambassador to Washington—is to ensure its fair implementation, said, “I think the agreement is achieving the results that were intended.” But the accord’s critics insist that it has been unproductive. Declared Ontario Premier David Peterson: “I don’t see any more guaranteed access than we had. I see a lot of things coming against us that are not particularly helpful. I have yet to be persuaded that free trade is in the national interest.”

Blame: In addition, the agreement’s detractors blame it for virtually every plant closure and corporate takeover. Said Barlow: “There have been more foreign takeovers in the first six months of 1989 than in the three previous years put together.” Added Liberal Leader John Turner: “Our predictions are coming true: plant closures, job losses, takeovers and a growing concentration of economic power.”

As well, the council maintains that Canada is selling off its long-term energy security to the United States under the agreement. In particular, Barlow said the council is concerned that the growing sales of Canadian natural gas to U.S. customers is out of control. Exports of natural gas to the United States increased by 36 per cent to 1,251 billion cubic feet during the 1987-1988 contract year, up from 920 billion cubic feet the previous contract year. And the National Energy Board (NEB), which regulates energy imports and exports, has been caught between western Canadian gas producers anxious to find a market for their natural gas and angry nationalists who are concerned that Canada is selling out its energy future to the United States.

The energy security issue is now a prime target of the nationalist group. In September, the NEB approved an application by Imperial Oil Ltd., Shell Canada Ltd. and Gulf Canada Resources Ltd. to export nine trillion cubic feet of natural gas from the Mackenzie River Delta. But now, the Council of Canadians has asked the NEB to hold new hearings into the matter, arguing that the NEB ignored the dangers contained in the FTA, which says that Canada can restrict exports to the United States only to the same extent that it reduces total consumption in Canada. Council spokesmen, along with other critics, say that if the sale goes ahead, Canada could be edging towards a point where it cannot cut back sales to the United States, because to do so would require a massive reduction in its own supplies.

‘Dementia’: But Crosbie says that many of the council’s concerns are “poppycock” and “juvenile dementia.” He says that just as many plants have opened as have closed and that it is impossible to determine the cause of every opening or closing. Most trade analysts who are impartially trying to assess the impact of the agreement tend to side with the minister, and his view seems to be endorsed by Canadian firms that are taking advantage of free trade to meet new U.S. competition head on. In June, fashion apparel manufacturer Mr. Jax Fashions Inc. of Vancouver opened a showroom in one of the toughest clothing markets of all, New York City. Although Mr. Jax now only sells to 200 U.S. retailers, president Louis Eisman says he expects about 25 per cent of sales to be generated in the United States within five years. Said Eisman: “We are as sharp operators as anybody in the United States. And I don’t give a damn about American companies coming into this market.”

Other companies are expanding their Canadian facilities in order to enlarge their U.S. sales as tariffs drop. Stanley Tools, a division of Stanley Canada Inc. of Burlington, Ont., has already received two orders from U.S. customers, a direct result of lower tariffs on toolboxes, according to president David Talbot. Stanley recently invested over $1 million in a g Smiths Falls, Ont., plant that will fill the orders and it plans 5 to spend in excess of $1 million in 1990 as well.

Drop: Meanwhile, thousands of Canadian consumers apparently want trade barriers between the two countries to fall even faster. During the election, the government said that many prices in Canada would drop as tariffs were reduced. But Canadians, who supported the agreement for that reason, still have found few price reductions. Partly as a result, they are flooding into U.S. border cities. And as they head south, the Canadian consumers, unlike the hundreds of pessimistic people polled by Maclean’s, seem to be saying that the Canadian and U.S. economies should be integrated even further. But the issue promises to be one of most volatile problems facing the Mulroney government in the coming years.

TOM FENNELL with SHONA McKAY and MICHAEL HARRISON in Toronto, LISA VAN DUSEN in Ottawa and WILLIAM LOWTHER in Washington