FREE TRADE

ROSS LAVER September 16 1985

FREE TRADE

ROSS LAVER September 16 1985

FREE TRADE

On a cold, cloudy morning late last January, 40 senior executives of some of Canada’s largest corporations filed into a conference room in a suburban Toronto office building for a highly unusual and confidential meeting. Among the influential participants: the chief executives of such diverse and powerful enterprises as Bell Canada of Montreal, Stelco Inc. of Toronto and B.C. Resources Investment Corp. of Vancouver. Their purpose: to form a blue-chip task force to pressure the new Conservative government of Prime Minister Brian Mulroney into negotiations aimed at liberalizing Canada-U.S. trade. Since that inaugural meeting—in telephone calls, over private lunches and in backroom lobbying sessions—Canada’s business elite has helped to push the historic debate about free trade to the top of the country’s economic agenda. Said David Braide, vice-chairman of Toronto-based CIL Inc., who hosted the first meeting and is chairman of the task force: “Right now there is an unusual degree of acceptance for the idea of hammering out a new trade agreement, and we must take advantage of that.”

Reciprocal: Indeed, never before in Canada’s history has the momentum for continental free trade been so strong and so widespread. For more than a century successive federal governments have backed away from a reciprocal open-door policy with the country’s biggest and closest trading partner because of fears that it would erode Canadian sovereignty. But now, led by such devout free-traders as Alberta Premier Peter Lougheed and Richard Lipsey, senior economic adviser at Toronto’s C.D. Howe Institute, a growing number of academics, business leaders and politicians are pressing for lower trade barriers. Their aim is to sidestep protectionist sentiments now building in the United States and to safeguard the country’s prosperity in a competitive global marketplace.

Last week the Macdonald royal commission on the future of the Canadian economy added an important voice to the chorus of private and public support for freer trade. After an exhaustive three-year study costing $20.6 million, the commission recommended that Ottawa and Washington phase out tariffs over 10 years and establish a bilateral body to rule on such nontariff barriers as quotas and government procurement policies. Said the report: “The day of the apologetic Canadian is gone, and there is no reason to suppose that our present confidence will be undermined by an arrangement designed only to secure a continuing exchange of goods and services with the United States.”

For Mulroney, whose government is

on the verge of a historic decision on the country’s trading options, the release of the Macdonald commission’s report could not have been better timed. Six months ago, at the Shamrock Summit in Quebec City, he and President Ronald Reagan signed a commitment to “halt protectionism in cross-border trade in goods and services.” Within days of that declaration International Trade Minister James Kelleher set out on a 15-city cross-Canada tour to test public support for trade liberalization. Later this month Kelleher is due to report to cabinet on his consultations and on the findings of a wide-ranging series of studies by federal bureaucrats on the anticipated effects of lower trade barriers on the economy. The expected result: Canada will propose to the Reagan administration this fall that the two countries launch formal negotiations leading to the signing of an all-embracing free trade agreement—perhaps as early as 1987.

In many ways, the growing consensus

by political and business leaders for North American free trade represents a dramatic retreat from the economic nationalism of the 1970s. According to pollster Allan Gregg, president of Toronto-based Decima Research Ltd., 80 per cent of Canadians now believe that the country should seek closer ties to the United States, compared to only 60 per cent who felt that way three years ago. And while free trade is not a burning issue among ordinary citizens, more than two-thirds of Canadians express generalized support for the concept, which most of them vaguely equate with increased sales of the country’s exports and more jobs for the 1.3 million unemployed. Said Gregg: “The tendency is to believe that the economic benefits of greater Canada-U.S. trade will outweigh the cultural risks.” But Gregg added that Canadians still harbor a deeply rooted ambivalence toward their neighbors to the south. “If the opponents of free trade are able to portray it as something that will make us lapdogs of the Americans, public support for the concept will quickly disappear.” 1986 to shift the balance of power in the chamber to the Democrats, who already have a majority in the House of Representatives. That worries Conservative free-traders in Ottawa, who point out that Democratic congressmen are much more likely than their Republican counterparts to pass sweeping trade restrictions. Declared Kelleher: “If it turns out that the Democrats gain control of both the Senate and the House of Representatives, that is a recipe for disaster.”

Destiny: Fearing such a backlash, the Mulroney government has so far approached the Canada-U.S. trade issue gingerly. The Tories are keenly aware that any firm commitment by Ottawa on free trade could trigger a volley of protests from economic nationalists who argue that by opening its borders to unrestricted two-way trade, Canada would be gambling with its own destiny. In addition, both organized labor and the Ontario government are poised to fight freer trade. They say it would pose a threat to thousands of manufacturing jobs—the vast majority of which are concentrated in Central Canada—because companies could not compete with larger, more efficient American manufacturers.

To that end, the Mulroney government has carefully avoided use of the words “free trade.” Instead, cabinet ministers employ such euphemisms as “trade enhancement” and “securing Canadian access” to U.S. markets. A government discussion paper released last January even refers to the goal of “a bilateral arrangement involving reciprocal market access commitments.” Declared Kelleher: “The semantics are very important. To the man in the street free trade conjures up an image of the United States as a blood-sucking Dracula. Most people do not understand what it is we are trying to accomplish.” In any case, he added, pure free trade is an unattainable ideal: the most that can be hoped for is some form of comprehensive trade agreement that eliminates tariff and nontariff barriers on most, but not all, goods crossing the CanadaU.S. border (page 30).

Unfair: If the Mulroney government does intend to begin trade talks with the United States, it will have to act soon. As Kelleher is quick to point out, protectionist pressure in Washington is bound to increase once formal campaigning gets under way for next year’s midterm congressional elections. So far Reagan has vowed to veto any purely protectionist bills. To satisfy congressional demands, the President criticized, in his Saturday radio broadcast, what he described as unfair trading practices by Japan, Brazil, South Korea and the European Community.

If recent political trends continue, there is a strong possibility that enough Republican senators will be ousted in Behind the scenes, Reagan administration officials were also beginning to warm to the idea of a two-way trade deal with Ottawa. Said one Canadian official who took part in the preliminary discussions in late 1984: “Our job was to feel them out, to see how much interest there was on their side in some sort of formal arrangement. Pretty soon everything began to gel.” Among the positive signals: a trade bill passed by the U.S. Congress last fall that authorized free trade with Israel and Canada and provided for the negotiation of similar bilateral trade agreements with other countries to reduce or eliminate tariffs and other trade barriers. Kelleher, the rookie trade minister from Sault Ste. Marie whom Mulroney named to spearhead the public discussions, moved quickly to orchestrate the debate. His January discussion paper laid out four options: the status quo; socalled “sectoral free trade” deals such as those favored by the Liberals; a framework agreement under which each government would simply continue talking about ways of reducing trade barriers; and a comprehensive bilateral trade arrangement that included the removal of virtually all tariff and nontariff barriers between the two countries. “There is no risk-free option, including the status quo,” the paper warned. Kelleher insisted that the Tory government still had an open mind on the question. But

In Canada the pressure for freer trade with the United States began to build long before last year’s landslide Conservative election victory. During the 1981-82 recession, developed countries around the world began to raise import barriers in order to shield domestic industries and preserve existing jobs. Because no country depends more heavily on free and expanding trade than Canada—30 cents out of every dollar of the country’s gross national product comes from exports—Canadians clearly had a lot to lose.

Dependence: At the same time, the then-Liberal government had concluded that previous attempts to lessen Canadian dependence on the U.S. market by expanding trade with Europe—Pierre Trudeau’s so-called Third Option—had failed. Between the early 1960s and 1983 Canadian exports destined for Europe fell to eight per cent from 25 per cent. As a result, bureaucrats in Ottawa began promoting trade liberalization as the best means of bolstering the economy.

Still, the Canadian public seemed unconvinced of the benefits of freer trade. In March, 1982, a Senate foreign affairs committee, headed by Liberal Senator George van Roggen, issued a report calling for a comprehensive free trade arrangement to improve Canada’s economic development —only to be disappointed by the study’s lukewarm public reception.

Architects: In the months that followed, however, the free trade option attracted an increasing number of converts among the architects of federal economic policy. Disillusioned by the failure of many of the government’s nationalist economic policies, the Liberals were casting about for a new economic platform that could help to restore economic growth while at the same time improving their fortunes in the business community. In August, 1983, then-international trade minister Gerald Regan issued a review of Canada’s trade policies that advocated socalled sectoral free trade arrangements, in which trading nations attempt to negotiate free trade on an industry-byindustry basis. Six months later Regan initiated talks with his U.S. counterpart, then-trade representative William Brock, on the merits of removing trade barriers in four specific industries: specialty steel products, mass-transit vehicles, agricultural equipment and computer services. Explained one high-ranking Canadian official last week: “In 1982-83 there was no widespread support from industry, the provinces and academics for full free trade. But our reading was that if we could get something started we might be able to move on to something broader.”

Anxious: Two events prompted a wider debate. First, negotiations between Ottawa and Washington on trade liberalization bogged down, partly because of opposition from the U.S. steel lobby and partly because the Reagan administration feared that any agreement between the two countries on sectoral free trade would be subject to challenge under the General Agreement on Tariffs and Trade, the 86-nation body established in 1948 that has led to a broad liberalization of world trade. At the same time, the Liberals, led by John Turner, were defeated at the polls and replaced by Brian Mulroney’s Conservatives, who were anxious to signal their desire for stronger economic relations with Washington in order to reap the benefits of Canada’s proximity to the huge U.S. market. Said Finance Minister Michael Wilson in his November economic statement: “The question is how best to capitalize on this advantage while maintaining the adjustment that freer trade would entail.”

he left little doubt that, of the four options available to the government, the Tories were leaning to an all-embracing free trade treaty—with negotiated exemptions for selected weak industries such as textiles, footwear and agriculture.

Action: Two days after Mulroney and Reagan stood among the cannons of Quebec City’s Citadel and vowed to work toward better trade relations, Kelleher set off on a cross-country tour to test the political waters. Over a six-week period, the 54-year-old lawyer visited 15 cities and collected briefs from industry, labor, consumer and cultural groups on Canada’s participation in world trade. If the tour sometimes resembled an election campaign, it was hardly a coincidence. Admitted a Kelleher aide: “We wanted to awaken the public to the importance of trade to Canada, to the fact that the time has come for us to take action.”

For their part, Canadian business leaders are almost unanimous in their support for freer trade between the two countries. More than 75 per cent of Canadian exports —worth $92 billion —were sold to the United States in 1984. Although most of the approximately 400 protectionist bills currently before Congress are aimed at Third World countries, Europe and Japan, Canadian manufacturers would almost certainly be caught in the crossfire of any worldwide trade war. Declared Brien Gray, vicepresident and general manager of the 72,000-member Canadian Federation of Independent Business: “There is a fear that Canadians will be affected by trade barriers that are really aimed at Japan or Korea.” And U.S. legislators have already erected barriers to Canadian hogs, and there are threats to limit

imports of lumber and fish.

In the face of such pressures, many businessmen say that Canada’s only recourse is to push for widespread trade liberalization. And they have spared no effort in presenting their case to federal

and provincial politi-

cians. Frank Petrie, president of the Ottawabased Canadian Export Association, for one, said that his organization has appeared before the special joint Commons-Senate committee on Canada’s economic relations to declare its support, and it has presented a brief to an Ontario legislative committee on trade policy. The group meets with cabinet ministers every week, including Kelleher, Wilson, Regional Industrial Expansion Minister Sinclair Stevens and External Affairs Minister Joe Clark. Added Roger Hamel, president of the Canadian Chamber of Commerce: “We have conducted an indirect lobby through the media in order to keep the message before the government that we want to move to freer trade through a comprehensive trade agreement.”

Ties: Outside business circles, support for free trade has come from such economists as Richard Lipsey, senior economic adviser to the Toronto-based C.D. Howe Institute, a privately financed conservative think tank. In a widely distributed monograph issued in May, Lipsey argued that Canadian industries were becoming increasingly unable to compete with producers in

lower-wage countries, including South Korea, Brazil and Mexico. As a result, he said, the only current possibility for major increases in Canadian exports lay in fostering closer economic ties to the United States. That in turn would lead

to greater efficiencies of production in Canada because manufacturers would be guaranteed access to a market of 250 million people rather than the 25 million they now serve.

According to Lipsey, the political momentum for freer trade is now so strong that it would be dangerous for the Tories to ignore it. “Five years ago the reverse was true,” he said. “But over the past year there has been a remarkable coming together of the views. I think that when Kelleher started his travelling circus he was surprised at the level of consensus for negotiations with the United States.” Added an adviser to Mulroney: “The ground of public opinion really is moving.”

The growth in Canadian exports to the American market

1954

1984

But while business leaders and Conservative politicians are pressing for closer ties to the United States, economic nationalists are gearing up to oppose them. Edmonton publisher Mel Hurtig, for one, said that unimpeded two-way trade “could spell the end of this country both culturally and politically,” and he accused the Mulroney government of attempting to manipulate public opinion in favor of liberalized trade.

Muscle: Another outspoken opponent of a comprehensive trade agreement is Harrison McCain, chairman of the board of McCain Foods Ltd. of Florenceville, N.B. In the midst of deliberations at the premiers’ conference last month in St. John’s, McCain sent each of the provincial leaders a 200-word Telex arguing that much of Canada’s agriculture and food-processing industry cannot compete with U.S.-based firms. “Unfettered free trade will result in a substantial reduction in employment and investment in Canada’s agro-food industry,” McCain wrote. He added a special postscript to Ontario Premier David Peterson, congratulating him for being the only premier not to push for freer trade. In fact, Peterson told Maclean’s that the premiers did not issue a joint communiqué on the subject because “none of the ones who were presumably in favor of it understood what the others were talking about.” Critics also worry that Canada would not have the muscle to negotiate from a position of strength—particularly if Ottawa enters the talks with the aim of shielding certain industries, including culture.

Risks: Despite those and other objections, Mulroney appears ready to stake his government’s reputation on the belief that most Canadians are willing to accept the risks that freer trade would entail. But as he prepares to make one of the most far-reaching decisions in Canadian history, the Prime Minister is also keenly sensitive to the political hazards that lie ahead. As he told a crowd of supporters during the 1983 Tory leadership campaign in Thunder Bay: “Free trade with the United States is like sleeping with an elephant. It’s terrific until the elephant twitches, and if the elephant rolls over you are a dead man.” Clearly, Mulroney is gambling that in future the colossus to the south will keep to its side of the bed.

ROSS LAVER

with

SANDY FIFE

ANN WALMSLEY

and

MARC CLARK

in Toronto,

ANTHONY WILSON-SMITH

in Montreal,

ANDREW NIKIFORUK

in Edmonton,

IAN AUSTEN

in

Washington and

HILARY MACKENZIE

in Ottawa