SPECIAL REPORT

CLEARING THE FINAL HURDLES

TRADE MINISTERS AGONIZE OVER THE FINAL TOUCHES TO A CONTINENTAL TRADE PACT

DEIRDRE McMURDY August 17 1992
SPECIAL REPORT

CLEARING THE FINAL HURDLES

TRADE MINISTERS AGONIZE OVER THE FINAL TOUCHES TO A CONTINENTAL TRADE PACT

DEIRDRE McMURDY August 17 1992

CLEARING THE FINAL HURDLES

SPECIAL REPORT

TRADE MINISTERS AGONIZE OVER THE FINAL TOUCHES TO A CONTINENTAL TRADE PACT

Through 14 months of late nights and bad coffee, they have never publicly appeared dishevelled or desperate. But last week, even the normally unflappable trade ministers of Canada, the United States and Mexico succumbed to cabin fever. At one point, during the days of gruelling final bargaining for a North American Free Trade Agreement (NAFTA), Michael Wilson, Carla Hills and Jaime Serra Puche giddily threatened to hang a banner from the window of a suite at Washington’s Watergate Hotel that read, “Free the NAFTA 100.”

The negotiators had plenty of company in their frustration with a process that was supposed to result in a trilateral trade deal months ago. Although they were close to resolving many key issues early last week, the talks nevertheless dragged on, slowed by the need to co-ordinate and update dozens of advisers from each of the three camps. Many of the participants were clearly frayed after a week of subsisting on club sandwiches named Wall Street, Dagwood and Picasso and sparkling, fruit-flavored water from the hotel’s delicatessen. They also formed long lines for service at the adjacent dry cleaners, the Watergate Valet. Said Eric Barry, president of the Ottawa-based Canadian Textiles Institute: “I was lucky. I packed enough shirts for three days, but other

people only had enough for one day.” Despite the last-minute push to reach an agreement that would create the world’s largest free trade zone, Canadian and U.S. negotiators generally expressed a listless impatience. In contrast to the spirit of euphoria that infused the final touches made to the 1988 Canada-U.S. free trade agreement (FTA), officials appeared merely resigned. From the outset, however, Wilson and his advisers said

that Canada had joined in the NAFTA negotiations to protect its trade position rather than to gain any new ground. And although the three sides had yet to release the final terms of the NAFTA deal at week’s end, it was clear that just standing still took even more energy than initially anticipated.

Indeed, as the end neared, Canadian negotiators were often relegated to the sidelines as U.S. negotiators pressed the Mexicans for eleventh-hour concessions. With pens poised, members of the U.S. team mounted one last assault on Mexico’s state-controlled oil and gas sector and its protectionist government procurement policies, which favor domestic suppliers. And despite Washington’s evident desire to reach an accord before next week’s Republican party convention in Houston, Hills refused to relent in her efforts to increase North American content levels for several industries. In doing so, she hit directly at Japanese-owned automobile plants in Canada and Canadian clothing manufacturers who rely heavily on imported fabrics.

Tough: The American team even singled out Canadian companies that make men’s suits out of imported wool fabric, attempting to pare import quotas outlined in the FTA. Under that agreement, Canadian suit producers have increased their shipments to the United States to 380,000 last year from 50,000 in 1988. “I

don’t understand it,” said Alvin Segal, president of Montreal-based Peerless Clothing Inc., which is responsible for 80 per cent of those shipments. “We’re just a little manufacturer. We’re not like the auto industry or the steel industry.”

However, many executives of Canadian companies had anticipated Hills’s tough trade line. A recent outbreak of bilateral trade disputes over beer, steel and auto parts has led to a broad reassessment of the entire FTA. Canadian business once hailed the trade pact as a

guarantee of unfettered access to U.S. markets and the settlement of disputes by impartial bi-national panels. But subsequent experience has demonstrated that Canadian companies are still subject to U.S. trade laws, and the arbitration process can be cumbersome and protracted.

Indeed, even while NAFTA negotiators have been trying to clarify those rules and their interpretations, some company officials have become so frustrated that they have tried to sidestep that process altogether. Last month, Canadian steel producers formed an alliance to address the stubborn trade problems with their U.S. counterparts directly. “Retaliation is nonproductive,” said Frederick Telmer, chairman of Stelco Inc. in Hamilton. “We have to develop a protocol to deal with our markets without the weak trade laws.”

Critics of the FTA also hasten to point out that 461,000 Canadian manufacturing jobs have disappeared since the pact went into effect on Jan. 1, 1989, and dozens of factories have closed or moved south of the border. Nancy Riche, vice-president of the Canadian Labour Congress in Ottawa, argues that neither expanded North American markets nor relaxed rules for foreign investment are of any benefit if employment continues to decline.

Even more worrisome than the outright migration of industry away from Canada, however, is the gradual failure of companies to expand or to re-invest in their Canadian operations. Cosmetic and soap manufacturer CCL Industries Ltd. recently closed a plant in Barrie, Ont., and management says that it has no plans to invest extensively anywhere else in Canada. Instead, said president and chief executive officer Wayne McLeod, the company plans to focus its future expansion in such areas as Mexico, where it already has three factories. “We need a toehold wherever there is growth in the market for our products,” he said. “We’d be crazy not to pull closer to 83 million people with an improving lifestyle.”

Mexico appears to be much less concerned about that adjustment than Canada. The enthusiasm of President Carlos Salinas de Gortari for NAFTA results in large part from his campaign to overcome the economic problems that nationalist and protectionist Mexican governments encountered during the 1970s and 1980s. Until Salinas took office in 1988, Mexico maintained high tariff barriers and rigid state control of key industries including oil and gas, banking and telecommunications. Those policies caused both foreign and Mexican investors to move billions of dollars out of the country and, by the time he took office,

Weakness: Despite the discouraging evidence put forward by opponents of both trade deals, some experts still insist that freer trade did not cause Canada’s economic dislocation over the past three years. Joseph D’Cruz, a professor with the faculty of management at the University of Toronto, says that the FTA “exposed the inherent weaknesses of an industrial structure based on a closed, protected economy.” He added, “The FTA just accelerated the inevitable process of decline and corporate strategic re-evaluation.” D'Cruz gcknowledged that the FTA and NAFTA are easy targets for criticism because “the benefits are intangible and the costs are very tangible.” But he said that the painful adjustment period is essential if Canada wants to share in the benefits of expanded international trade.

Mexico’s foreign debt had soared to more than $100 billion.

Reversal: But since Salinas began reversing those policies, investment has flooded back into the country, led by such large multinational corporations as the Big Three U.S. automobile manufacturers. Annual car production in Mexico has doubled since 1988 to one million vehicles and by the end of the 1990s, that number is expected to climb to three million. By comparison, Canada produces about 1.9 million vehicles annually, mostly under the regulated trade arrangements of the Auto Pact. The Salinas government has aggressively encouraged multinationals to locate in Mexico and take advantage of its low wage rates. The conclusion of a NAFTA would provide additional incentive for companies to move to Mexico.

Other Latin American and Caribbean nations have trained a close eye on the Mexican economic experiment and appear eager to follow suit. “There’s an immense wave of enthusiasm for open markets in Latin America,” said D’Cruz. “They all look at Mexico and marvel at the progress because it was a basket case for so long.” He noted that Argentina has already opened its borders and that the resulting increase in trade volumes has helped that country to control its inflation rate and other economic problems.

As well, Mexico is actively encouraging other nations to follow its model. Earlier this year, Mexico signed a bilateral free trade agreement with Chile, and the Salinas administration is currently negotiating a comprehensive free trade agreement with five of its Central American neighbors: Costa Rica, El Salvador,

Guatemala, Honduras and Nicaragua.

The influx of investment and industry into Mexico is fuelling a boom that extends far beyond low-wage and lowtech sectors of the economy.

Contrary to popular stereotypes, Mexico’s population is relatively well-educated compared with other developing

countries, and it has a technologically literate middle class of engineers, managers and other professionals. Nuala Beck, an independent Toronto-based economic consultant, said that Mexican exports of technologically sophisticated products to Canada already exceed Canada’s exports of similar products to Mexico by a ratio of 4:1. “We assume that we will sell them sophisticated equipment and they’ll sell us sombreros and sandals,” Beck said. “That is a dangerously misleading assumption.”

Terms: Canadian negotiators at the FTA and NAFTA talks were clearly aware that some jobs and industries would shift south after Canada eliminated tariffs and other trade barriers. Even critics of freer trade acknowledge that much of Canada’s manufacturing sector, made up of small and often outdated branch plants, is not capable of surviving in an era of more

intense international compe tition. "Globalization is inev itable," said the Canadian La bour Congress's Riche. "The question is how you negotiate terms for your country." Costs: Seated at the bar gaining table, the Canadian delegations have had to weigh the benefits of guaran teed access to continental markets against the cost of consequent adjustment. D'Cruz, for one, said that "the real danger is that Cana da has insufficient energy be hind the necessary process of economic renewal." He add ed that because "there is no such thing as a permanent competitive advantage," Canada must adapt to the emerging global economic or der by educating and training workers and investing in new technology.

One advantage of such a national strategic repositioning would be the opportunity to create new, technology-intensive manufacturing jobs—or even to repatriate some that have been lost to lower-wage countries. D’Cruz points to Japan, where advances in manufacturing technology have overcome the deterrent of higher wages and allowed such companies as Sony Corp. to gradually bring jobs back from Malaysia, Australia and other lower-wage regions.

Another option for Canada under the “new economy,” according to consultant Beck, is to position itself as an attractive head-office base for companies with North American or global operations. She said that Canada’s strong banking and insurance sector, combined with its relatively stable political climate, make it an ideal location for such investment. “Three

_ tanned politicians sitting at a

table and sipping ice water, is no constitutional crisis,” she said. “Yugoslavia is a constitutional crisis.”

But while the trade teams in the Watergate last week worked over the final details of their long-awaited agreement, they were attempting to accomplish the impossible: predicting every possible result under the new set of rules. That slowed the negotiations to a snail’s pace. However tempted they were to let down their guard after a week of club sandwiches and dirty shirts, the spectre of the disaster that could be caused by a major miscalculation left them with no other choice.

DEIRDRE McMURDY

JOHN DALY