MARY JANIGAN October 5 1987


MARY JANIGAN October 5 1987




The tough ultimatum was issued after a morning of ill-tempered negotiating. On the fifth floor of Washington’s Winder Building, where Abraham Lincoln once studied Civil War battle reports, the American delegation at the Canada-U.S. free trade talks had just finished their luncheon sandwiches last week when Gordon Ritchie, Canada’s deputy trade negotiator, appeared. Ritchie demanded that the two sides discuss the Canadian definition of one key issue, subsidies —and ignore the U.S. definition —during the afternoon bargaining session. Apparently startled, U.S. deputy negotiator William Merkin walked downstairs to the fourth floor office of Simon Reisman, Canada’s chief negotiator. Merkin rejected Canada’s demand —and insisted that both definitions be on the table. The effect was electric. The

irascible Reisman promptly marched upstairs to the office of chief U.S. negotiator Peter Murphy and, with a firm handshake, announced that he was suspending the free trade talks— the linchpin of the Conservative government’s economic strategy.

Flamboyant: With that, Reisman stalked out of the building into a thicket of microphones and cameras— and read a four-sentence statement declaring that negotiations were at an impasse. As his startled delegation struggled to catch up with him, he headed directly to the airport, flew to Ottawa and delivered a sombre briefing to Prime Minister Brian Mulroney, senior cabinet ministers and key officials. Reisman later told reporters that the outlook was grim: “The Americans have not come up with enough to meet our bottom line. As far as I am concerned, the negotiations are over.”

Reisman’s flamboyant departure ap1 peared to mark the end of the ConserI vative government’s goal of a free trade deal with the United States. For more than two years the Mulroney government has pledged that an accord would shield Canadians from American protectionism and create economic prosperity across the country. The suspension of the talks left the government open to the charge that it relied too much on achieving a comprehensive deal with the Americans. And it threatened to leave critical sectors of Canada’s economy vulnerable to new attacks from increasingly protectionist industrial and political leaders in the United States (page 18).

Despite those risks, Mulroney served notice late last week that he would abandon the negotiations completely if the United States did not

pay attention to Canada’s demands. As he told 500 people at a chamber of commerce dinner in Sherbrooke, Que.: “Unless the United States demonstrates its willingness to arrive at a fair agreement that respects what we hold to be fundamental, the negotiations will not resume. If a fair deal cannot be achieved, Canada will say no.”

Stalemate: In fact, senior officials on both sides of the border worked through the weekend seeking a formula to bring Canada back to the table. In round-the-clock telephone discussions that Mulroney’s Chief of Staff Derek Burney held with U.S. Treasury Secretary James Baker, the Reagan administration made three proposals for a mechanism to settle trade disputes—a basic Canadian concern. Among them: the suggestion that Congress set up a separate process to handle bilateral trade problems. The Americans included that proposal in a two-page, single-spaced memorandum outlining a framework for resuming the negotiations. But the memo, delivered late Saturday, also demanded that Canada put its sensitive cultural, regional development and investment policies back on the table.

After wrestling with those demands through the night, the Mulroney government told Washington—in a fourpage letter delivered by Canada’s Ambassador Allan Gotlieb —that its proposals were too ambiguous. Declared Reisman: “It was made crystal clear that we will have to have a great deal more precision.” Mulroney’s communications advisor Bruce Phillips cited the Reagan administration’s looming deadline—midnight, Oct. 4— for notifying Congress of its intention to sign a deal. Said Phillips: “With more time, the tougher it becomes.”

The Canadian response left the talks stalemated, the result of a bold gamble-beginning with Reisman’s dramatic and carefully scripted walkout—to get the Americans to pay serious attention before the deadline passed. A senior Canadian official said that it had become clear that the Americans were not going to move “anywhere near the basic essentials for an equitable deal.” In a last-ditch effort to prove that Canada did not want a deal badly enough to accept any deal, senior officials planned the walkout, drafted Reisman’s statement and advised him to use a tone of mellow regret.

Gulf: That strategy was approved by Mulroney, Burney and Gotlieb. “Reisman’s lines were all authorized,” declared a senior official familiar with the plan. “The point was to make sure that the message of great disappoint-

ment got through very clearly.”

Last week’s dispute clearly illustrated the great gulf between the two sides. Canada had demanded a binding mechanism to settle trade disputes, coupled with protection for Canadian culture and regional subsidies. The United States wanted to resolve its concerns about automotive trade, and it sought Canadian concessions on investment, energy and cultural programs. U.S. negotiators also expressed concern that Congress would never accept a dispute settlement mechanism that curbed its ability to legislate on trade. As an Ottawa consultant who has followed the negotiations closely told Maclean’s: “There are not just a few small gaps that can be closed with effort and political will. Instead, there are quite a few gaps, and some of them are very wide. Some go back to fundamentals that should have been cleared up months ago.”

Shrewd: The walkout also focused attention on the political and economic upheaval that would follow any final breakdown in the talks. The Conservatives could pay a hefty political price for failure if Canadians conclude that they have gambled heavily on a trade pact in their economic planning—and failed. Liberal Leader John Turner charged last week that “the Yankee trader has played a very shrewd game.” Added New Democratic Party Leader Ed Broadbent: “If their principal agenda item falls through, [the Conservatives] are just down the drain politically.” And in Montreal last week, Mulroney agreed with his earlier statement that his “neck is on the line.” If the trade talks fail, he added, “people are going to reproach me for the failure.” But, added the Prime Minister: “So what else is new? You don’t get anywhere trying to build a country by failing to take risks.”

Still, senior Conservatives also maintained that Mulroney might turn even a failure into success. They said that they had been reassured by Ontario Premier David Peterson’s remark last week that “there is no disgrace in trying and failing.” And they noted that it would be easier to explain failure than to promote a flawed agreement that made major concessions in such sensitive areas as investment policy and culture. Said one Tory: “Free trade was a tough go from the start. The benefits are longterm and amorphous, and the losers are obvious and specific. [If the talks fail,] the line of the government will be very effective: ‘We had the courage to try, but we weren’t prepared to sell out the country’s essential interests.’ If you can’t win,

your next best thing is not to lose.”

The economic consequences of failure may be more serious. Last month the prestigious Economic Council of Canada predicted that free trade would create at least 189,000 jobs in all regions of the country by 1995. In the council’s best-case outcome, free trade would add 350,000 new jobs by that year. Proclaimed council chairman Judith Maxwell: “It is like getting an extra year of growth.”

Without free trade, many economists now say, the future may be grim. Congress is now considering a restrictive trade bill that would sharply penalize imports from other countries, including Canada. Meanwhile, Canadian trade consultants add that American companies are already preparing legal cases against Canadian imports in the printing, wine and pharmaceutical industries. Said one Canadian consultant:

“All hell is going to break loose in Canada.”

Declared Paul Fekete, a trade consultant for the Washington-based Government Research Corp.: “There will be a deterioration in the relationship because there will be an end to the hiatus of trade cases that has occurred during the talks.”

Rougher: Canada had made tentative plans to compensate for a failure in the talks. To begin with, Canadian trade officials will devote more attention to the ongoing round of negotiations of the 92nation General Agreement on Tariffs and Trade (GATT). Said one senior official: “We would have to put all our negotiating strengths into the multilateral system.” Canada also planned to try to improve trade relations with the European Community, Japan and such developing countries as South Korea and Brazil. And Ottawa was considering countering any punitive U.S. trade bill aimed at Canadian imports with a mirror-image law against American products.

Some experts claimed that the free trade talks would have positive aspects, regardless of the outcome. Thomas d’Aquino, chief executive of the Business Council on National Issues, which represents 150 chief executives of major Canadian corporations, said that the talks have

increased U.S. and Canadian expertise on trade issues and improved their mutual understanding. If an accord cannot be reached, he said, “the Americans will not lash out at us with a vengeance.” He added: “There is no question that it is going to become rougher, that there is going to be hand-to-hand combat on some individual issues. But we should not reach for a cup of hemlock.”

Influence: Canada’s dramatic efforts to bring the talks to a successful conclusion began in earnest two weeks ago, when Reisman briefed Mulroney and his key cabinet advisers, the so-called Executive Committee, on free trade. Reisman was pes-

simistic: he told them that the Americans had not addressed Canada’s major concerns even though time was running out quickly. Members of the cabinet committee—which includes Finance Minister Wilson and International Trade Minister Pat Carney—drew up a list of the fundamental elements that Canada demanded in a free trade deal. Then they asked Wilson and Mulroney’s Chief of Staff Burney to take that list to Washington as a message from the Prime Minister to President Ronald Reagan.

Ambassador Gotlieb quickly asked for an appointment with Reagan’s chief of staff, Howard Baker, or with National Security Adviser Frank Carlucci. The Canadians reasoned that both men have influence with Reagan. A White House official responded that

Treasury Secretary James Baker, chairman of the Economic Policy Committee which formulates the Reagan administration’s economic strategy, was its key representative in the negotiations. As a result, Wilson, Burney and Gotlieb met with Baker for an hour on Sept. 19. They presented Canada’s one-page list of fundamental demands, including the key request for a binding mechanism to settle trade disputes.

The three men also expressed their fear that Murphy did not have a broad mandate from Baker’s economic policy committee. The Canadian team pointed out that Reisman had a clear mandate. According to a senior Canadian

official, the three men complained that Murphy “did not even have a mandate on all the issues.” Another top Canadian official said that the trio had a single message to deliver: “We are going to be sure that our negotiator has the flexibility and the will to drive this to a successful conclusion. We would urge that you do the same.”

Ignored: The Americans did not make any firm undertakings. Indeed, Baker indicated that he would not intervene in the process. But the Canadians said that they hoped that their intercession would produce results. But two days later, when last week’s explosive three-day round of negotiations began, their optimism disappeared. As a senior official noted later: “We came to deliver a message. And we did. It did not have the effect that we would

have liked on the negotiations.” Another official added that the American position “created a wider gulf—the proposals were a move back from where they had been earlier.”

There were, of course, two versions of what led to the walkout. According to senior Canadian officials, the trouble began when the Americans ignored Canada’s greatest concern: the creation of a binding mechanism to settle trade disputes. Under American law, company executives can complain to the International Trade Commission when they believe that another country is unfairly subsidizing exports to the United States. The executives must also indicate that those subsidized exports are hurting American industry. If the trade commission and the U.S. department of commerce agree with those claims, the department imposes a special duty on the challenged product.

Arbitrary: Those duties have traditionally been recurring irritants. As the free trade negotiations began in May, 1986, the United States imposed a special duty on shakes and shingles from Canada. Last January, in response to U.S. threats to impose another duty on softwood lumber, Canada imposed a 15-per-cent export tax.

Then last month, in another controversial announcement, the United States imposed preliminary duties of up to 85 per cent on Canadian potash.

Those decisions angered Mulroney and reinforced his determination to obtain a trade agreement that would protect Canada from arbitrary U.S. action. The Prime Minister called for the creation of a panel, with members from both nations—and with the final power to settle trade disputes. To make decisions, that panel would need a clear definition of what constitutes a subsidy and a list of acceptable and unacceptable subsidies.

Last week Reisman insisted that the negotiators address those demands. Canadian insiders said that the United States responded with a

narrow definition of subsidies that did not include all types. It also classified most federal regional development assistance to private industry as an unfair export support. Canada, in contrast, has always insisted that a free trade deal will have to allow the federal and provincial

governments to promote business development in poor regions.

The Americans did not produce a proposal for a dispute-settling mechanism. Instead, shortly before Reisman stormed out, they repeated their demand that Canada abandon such cultural policies as Bill C-58—the 11year-old law that stopped Canadian

firms from deducting the cost of advertising in Canadian editions of American magazines and on U.S. broadcasting stations along the border. As a key Canadian insider declared: “We have been saying that culture is not on the table since Day One. You cannot find a finer example of how the Americans could not grasp

or understand our point of view.” The Americans also have a list of complaints. U.S. officials said that they wanted to settle key items in the pact—before they decided how to resolve disputes that arise from it. In particular, they had an agenda that included Canadian policies on investment, culture and energy. They also wanted to discuss Canada’s controversial program of granting a refund on import duties on cars shipped into Canada if the overseas automakers bought Canadianmade parts. The Americans complain that the policy gives an unfair trade advantage to Canadian auto-parts makers.

Attention: But the Americans could not get those issues on the table. Instead, Reisman stuck to his agenda-

subsidies and dispute settlement. As a U.S. official declared: “Reisman was very insistent on coming back over and over again to this issue. Our feeling was that we should have an agreement before we worried about how to settle disputes over it.”

Reisman’s walkout did manage to attract a flurry of political attention in Washington last week. Still, the Mulroney government had to face the unpalatable fact that a free trade agreement is far more important to Canada than it is to the United States. As a reminder, Mulroney visited Dominion Textile’s Domil mill in Sherbrooke last week. Many of the 350 workers complained that they did not understand how a free trade deal would

work-and they said that they feared for their livelihood. They asked the Prime Minis ter to protect their jobs

and to ensure that any changes would be gradual. Those pleas emphasized how much Canada had to lose—and to gain—when Reisman walked out in Washington.