Conflicting signals

June 9 1986

Conflicting signals

June 9 1986

Conflicting signals


“lam not in any way impressed with the idea of the word retaliation.”— Prime Minister Brian Mulroney, May 29, 1986

“We are going to have to retaliate. The one thing we cannot afford to do is allow ourselves to be looked upon by the Canadian people as pushovers.”—Justice Minister John Crosbie, May 28, 1986

For a time last week the Mulroney government seemed unwilling— or unable—to make up its mind. One day it was determined to retaliate for the U.S. decision to impose a stiff new 35-per-cent tariff on Canadian cedar products. The next day it looked as if Ottawa had never considered retaliation. One day the Prime Minister was hurling angry verbal broadsides at President Ronald Reagan’s administration. The next, he had begun a muted game of diplomacy aimed at minimizing the damage—economic and political—from Reagan’s controversial May 22 manoeuvre. One day Ottawa was demanding compensation from Washington for injuries the new tariff would cause to Canada’s $250-million shake and shingle industry. The next, it conceded that the quest for compensation had been summarily abandoned. The government’s actions, charged Liberal House Leader Herb Gray, amounted to nothing more than “amateur hour on the Rideau.”

For the most part, it was a week full of movement without action. In Ottawa, cabinet ministers conferred with representatives of British Columbia’s cedar industry, where 4,000 jobs are threatened by the U.S. import levy. In Washington, Canadian envoys met with senior U.S. trade officials to seek compensation—and were quickly rebuffed. In fact, it was not until May 30 that the government finally hinted at how it would answer the American challenge—and even then the response was ambiguous. Emerging from a 70-minute meeting with U.S. Secretary of State George Shultz in Halifax, almost all of it devoted to the tariff dispute, External Affairs Minister Joe Clark said the cabinet would be “considering a range of economic options.”

Still, the government appeared unable to reconcile the costs and benefits of reprisal. On the one hand, retaliation would send a strong signal to Washington that might deter imposition of sim-

ilar tariffs on even more critical Canadian industries in the future. On the other hand, a hasty response would risk further damage to Canada-U.S. relations and to the fledgling free trade negotiations between the two countries. Domestically, the Conservative government could score political points by act-

ing with firmness. But the firmer the action, the greater the threat of sparking a bitter tariff battle with the Americans that Canada would likely lose. U.S. experts, however, said Mulroney would soon be compelled to act. Said Gary Hufbauer, an international trade lawyer in Washington: “If he does nothing, he will be regarded as a paper tiger.”

As the days passed, Mulroney was increasingly under attack. Unions and companies directly affected by the ce-

dar tariff rejected the government’s initial strategy of demanding compensation—in the form of reduced U.S. tariffs on other Canadian goods—for the damage to their industry. So did the opposition parties. Washington’s refusal to compensate, said Liberal trade critic Lloyd Axworthy, was “something

that everyone except the Canadian government knew would happen.” And New Democratic Leader Ed Broadbent was ejected from the Commons after suggesting that the Prime Minister had misled Parliament on the issue.

In the House, the opposition parties also charged Mulroney with ignoring appeals from British Columbia—including two from Premier William Bennett—for action to head off the U.S. import penalty. And as he prepared for this week’s conference of first ministers

in Ottawa, the Prime Minister faced intense pressure from provincial premiers to define the role he had promised them in the free trade talks. Even more troubling, the Conservatives were acutely aware that those negotiations could be marred again by an increasingly protectionist U.S. Congress. The most serious threat: an application by a coalition of U.S. lumber companies for penalizing duties against Canadian softwood lumber imports worth some $3.5 billion a year. Conceded one senior official: “There are considerable fears that anything we do will increase the likelihood of negative future decisions on softwood lumber.”

For the government, the failure of the compensation strategy was an embarrassment.

Initially, Ottawa was pleased that Washington did not reject the Canadian demand for a meeting to discuss compensation— although a May 22 Washington press release outlining the U.S. tariff action clearly noted that, because the cedar products were not covered by the General Agreement on Tariffs and Trade (GATT), “we will not have to compensate our trading partners for any damage to their exports.” But after a one-hour meeting on May 29 in Washington with U.S. free trade negotiator Peter Murphy, a Canadian official conceded: “There is no room to manoeuvre.” Later in Ottawa, with Clark and Mulroney in Halifax for a NATO ministerial meeting,

Finance Minister Michael Wilson told the Commons that compensation was “no longer under discussion because there was no legal power for the U.S. administration to deal with it.” Nevertheless, a close aide to the Prime Minister insisted that, far from changing course last week, the government had pursued “a calculated set of responses, very deliberately.”

At the same time, U.S. Ambassador to Ottawa Thomas Niles bluntly dismissed Mulroney’s tough initial response to the tariff decision as an overreaction. The Toronto Star reported that Niles, in a cable to Shultz, described Mulroney’s outburst in Parliament as “extraordinarily negative” and added that “the [Canadian] government, as expected, is showing signs of panic

under attack from the opposition.”

Niles was only slightly less forceful in a letter he dispatched last week to major Canadian newspapers. He noted that Canada had recorded a $6-billion (U.S.) trade surplus with the United States in the first quarter of 1986, more than 30 times the annual value of Canadian exports of shakes and shingles. “Let’s maintain some sense of proportion,” Niles suggested in his letter. The tariff, he argued, did not constitute a “mortal blow” to the Canadian cedar industry. Wilson later disputed Niles’s figures, noting that Canada’s deficit trade in services, which in 1985 totalled $13.4 billion, had to be included.

The dispute strengthened the resolve

of provincial premiers to win full participation in the free trade talks. At a minimum, the provinces want a say in setting Canada’s bargaining position before the next round of negotiations resume in Washington later this month. Mulroney’s alleged failure to heed Bennett’s warnings was the “perfect example of the necessity of full provincial participation,” said Alberta Intergovernmental Affairs Minister James Horsman. Meeting last week in Swan River, Man., premiers of the four

Western provinces added a new condition to their support of trade negotiations: that both countries suspend their right to impose new tariffs during the life of the talks. Mulroney has already rejected a similar demand by the Liberal opposition.

In Ottawa, some senior government officials recommended the Prime Minister go slowly on another front as well. Maclean's has learned that after Mulroney criticized Reagan’s action as unacceptable, unfair and bizarre, aides responsible for drafting the Canadian strategy—including secretary to the cabinet Paul Tellier—began to get “cold feet” about immediate and stiff countermeasures against the United States. Mulroney’s rhetoric, an aide to Finance Minister Wilson conceded, had created the expectation of tough reprisals. The aide added, “Well, it just doesn’t work that way when you are dealing with the Americans.” Although retaliation might be necessary, Canadian options were limited by the dangers of upsetting Canadian consumers of any restricted imports and of damaging Canadian industry should Washington respond in turn.

The most likely scenario would be for Canada to impose similar tariffs on certain U.S. exports which, like shakes and shingles, were not covered by GATT. Conceivably, the tariffs could be on potatoes, fruits and vegetables imported from Oregon and Washington, where lumber companies stand to gain considerably from Reagan’s cedar tariff. But, said one senior Muloney aide: “The sad part is that if we retaliate, it will not necessarily help out the shakes and shingles guys.”

By week’s end, the sobering effects of the Reagan tariff were already being felt. The price of rough cedar blocks used in shake and shingle mills plummetted from $340 a cord to $240. And about 500 loggers on Vancouver Island were threatened with layoffs. Said Jack Munro, B.C. regional president of the International Woodworkers of America union: “We are talking about the death of an industry here.” Meanwhile, Canadian officials insisted that Ottawa’s angry reaction would help avoid any future surprises. Declared Clark: “The United States is getting the message about Canadian sensitivities.” For the Conservative government, the hope was that the message delivered to Reagan would not do fundamental damage to a relationship upon which so many Canadian jobs, and so much of Mulroney’s political agenda, depend.