BUSINESS

ESTRANGED PARTNERS

TRADE DISPUTES THREATEN THE FTA

NANCY WOOD March 16 1992
BUSINESS

ESTRANGED PARTNERS

TRADE DISPUTES THREATEN THE FTA

NANCY WOOD March 16 1992

ESTRANGED PARTNERS

BUSINESS

TRADE DISPUTES THREATEN THE FTA

The visitors have been polite but persistent. Over the past year, as many as three at a time have called on CAMI Automotive Inc. of Ingersoll, Ont., to ask pointed questions and root through the company's records. The investigators have enjoyed their astonishing access to the company's accounts because they work for the United States Customs Service. They claim that they suspect the car-and-truck factory near London is producing vehicles that, under the terms of the Free Trade Agreement, are not "made in North America." if the customs bureau con cludes that the plant, jointly owned by General Motors of Canada Ltd. and Suzuki Motor Co., is merely an assembly depot for parts made mostly in Japan, its cars will be charged a 2.5per-cent duty-and its trucks a crippling 25per-cent duty-before they can be sold in the United States. As he considered that possibili ty, CAMI's vice-president of finance, Michael Nylin, was firmly optimistic last week. Said Nylin: "if we get an objective audit, we will get a clean bill of health."

But elsewhere, there was dismay after U.S. customs ruled that 90,000 cars built at Honda Canada Inc.’s plant at Alliston, Ont., in 1989 and 1990 had failed its test. That decision could leave Honda with a bill of $22 million for overdue duty. Among Canadian exporters, the concern ran much deeper. In Ottawa, officials from the Prime Minister to junior trade representatives openly expressed concern that the investigations of Honda, CAMI and a third Canadian auto plant, owned by Toyota, were biased. For his part, Brian Mulroney described the lumber decision as “unacceptable,” adding: “It’s politics, not law.”

The American scrutiny of Canadian automakers is an additional friction at a time when trading relations between Canada and the United States are already tense. Three years after implementing the FTA, the two countries are negotiating to include Mexico in an expanded continental pact. Those talks continued last week, even as some of those who helped to

design the original FTA expressed doubts about whether it is working as intended to shield Canada from the wave of protectionism that has swept the United States in this recessionstricken election year. Underscoring those doubts, the U.S. commerce department announced Friday that it considers Canadian softwood lumber to be unfairly subsidized—and placed a 14.48-per-cent duty on about $3 billion worth of this country’s exports. Declared Edward Boswell, vice-chairman of the

Canadian Forest Industries Council: “Taken against any other country, it would have led to a massive trade war. We are the victims of the politics of protectionism.”

Neither the Honda nor the lumber decisions are final yet. Both appear likely to reach FTA disputeresolution panels—where Canadian experts, at least, confidently predict that the Canadian arguments will prevail. In the meantime, however, Canadian lumber companies will have to post millions of dollars in bonds to cov-

er the provisional duty on softwood exports.

The combination of U.S. rulings led the Conservative government to mount a co-ordinated political counterattack. In addition to his public declarations, Mulroney granted rare indepth interviews to both The New York Times and The Washington Post, emphasizing Ottawa’s displeasure with the flurry of protectionist attacks on Canadian exports. External Affairs Minister Barbara McDougall told a California luncheon audience: “This is a serious irritation in what was a productive agreement.” And in Washington, Canadian ambassador Derek Burney said of the U.S. decision: “Domestic political considerations and the recession are the

The Disputed Engine

An independent audit done last year by the University of Michigan determined that 42 per cent of the parts in a 1989 Civic engine, based on value, were made in the United States and 58 per cent in Japan.

main underlying issues of why Canada is getting knocked.” Privately, Canadian officials took a stronger position, telling their American counterparts that unless the trade disputes end, the goal of an expanded North American free trade agreement—and even the original agreement itself—will be in danger.

For their part, experts in the United States dismissed last week’s rulings as the normal workings of American trade law. Said economist Jeffrey Schott, a research fellow for the Washington-based Institute for International Economics: “When you have a trading relationship of $200 billion a year, it will produce frictions.” Added Schott: “One of the benefits

of the FTA was the establishment of the disputesettlement mechanism.”

But in fact, America’s protectionist mood is clearly linked to the political emotions stirred by November’s presidential election. That is particularly the case for President George Bush, whose campaign for re-election has been dogged by right-wing challenger Patrick Buchanan’s demands that Washington act to protect American industry from foreign competition. “It puts a lot of pressure on the President to show that he can be as protectionist as the next guy,” said Gordon Ritchie, Canada’s deputy chief trade negotiator during the FTA talks and now an Ottawa consultant. But even if the American political climate softens after the November election, the current outbreak of protectionist actions may already have done lasting damage—both to Canada’s benefits under the FTA and to Mulroney’s government.

Honda last week confirmed its commitment to keep its Alliston plant open whatever the outcome of the dispute. But some industry analysts said that the U.S. customs ruling could discourage further Japanese investment in Canada. Liberal free trade critic Roy MacLaren, for one, accused Washington of sending out a clear message to “invest in the United States—otherwise we will use every device we

can think of to ensure that those exports from Canada into the United States are subject to harassing treatment.”

For other critics of the Mulroney government, the week’s events offered additional reasons to get rid of both the Tories and the FTA. Said NDP trade critic David Barrett: “As far as the Tories go, they have been skinned, and it has been either stupidity or cupidity.” The New Democrats have pledged to abrogate the agreement if they are elected to power. MacLaren’s Liberals, meanwhile, say that they would renegotiate certain sections.

In his Ottawa office overlooking Parliament Hill, former negotiator Ritchie was among those who said that U.S. resistance to imports from Canada may indeed lead to cancellation of the FTA. He added: “If the Americans continue to play this game, they will ensure that the next government—whatever it is—is composed of people committed to ending the FTA.” For CAMI and its more than 2,000 employees at Ingersoll, a more immediate concern is whether the agreement is capable of defending their interests, even while it is in full force.

NANCY WOOD

JOHN DALY

HILARY MACKENZIE

ANNE GREGOR