Canada Big Hug from Uncle Sam

By Gordon Bock

/ Few economies are more closely intertwined than those of Canada and the U.S. Canada sends fully 77% of its exports to the U.S., while America puts Canadian addresses on 21% of its shipments. Now that tight and sometimes tumultuous relationship stands to become even tighter, thanks to the historic new trade pact between the two nations.

The hard-won agreement, worked out over 16 months of arduous negotiations and an intense last-minute push to meet an Oct. 4 deadline imposed by Washington, aims at creating nothing less than the world's largest open market. If the tentative accord wins the approval of the U.S. Congress and the Canadian Parliament, all tariffs and many other restrictions that impede the flow of goods and services between the countries will vanish by 1999. President Reagan called the agreement an "important model for other nations seeking to improve their trading relationships." To Canadian Prime Minister Brian Mulroney, it was simply a "good deal."

Mulroney is counting on the pact to give a boost to a country that at the moment has a modest surplus in world trade. From 1980 to 1984, Canada's exports surged from $67.7 billion to $90.3 billion, fueled largely by sales to the U.S. of such products as softwood lumber, newsprint, autos and trucks. By 1986, however, exports had slipped to $89.7 billion, partly as a result of a falloff in Canada's revenues from oil sales. Canada had an $11 billion trade surplus with the U.S. last year, but a $5 billion deficit with the rest of the world.

Fears that shipments to the U.S. would be increasingly constricted by trade barriers led Mulroney to propose a free-trade treaty to Reagan during the second "shamrock summit," which took place last year. Reagan, an avowed free trader, embraced the idea. But even as negotiations proceeded, bitter disputes arose. In one case, the Administration bowed to pressure from U.S. lumber companies by slapping a 35% tariff on Canadian cedar shakes and shingles.

While both sides agreed on the goal of free trade, working out the details proved to be maddeningly complex. Just three weeks ago, Simon Reisman, Canada's chief negotiator, stormed out of the talks in Washington and flew home. The major sticking point was agreement on a mechanism to resolve trade conflicts. At Mulroney's insistence, the Canadians returned to the bargaining table, but the wrangling continued until the deadline day. Finally Mulroney's chief of staff, Derek Burney, asked U.S. Treasury Secretary James Baker when would be a good time for the Prime Minister to call the White House to tell Reagan their effort had failed. "That got the wheels moving," Burney recalls. The breakthrough came when both sides agreed that panels of U.S. and Canadian experts would be empowered to mediate any trade disputes that arise.

The treaty is expected to be passed by Congress and Canada's Parliament, but not without an argument. While exporters on both sides of the border are looking forward to improved sales, some businesses, from Canadian wineries to American cattle ranches, are worried about increased competition from imports. In Canada, the political opposition to Mulroney's Progressive Conservative Party is already trying to stir up long-held fears of U.S. domination. Said Liberal Party Leader John Turner: "When he was elected, our Prime Minister said that Canada was open for business. Today the Prime Minister has put Canada up for sale."

Mulroney concedes that the trade pact could cause layoffs in some industries but maintains that by the end of the century, 350,000 more Canadian jobs will be created than will be lost, for a gain of about 3% from current work-force levels. Government experts estimate that the agreement will by 1999 account for a 5% rise in Canada's gross national product ($355 billion last year). At the same time, America's GNP ($4.2 trillion) could grow by 1% as a result of the increased trade. Canadians expect to boost exports to the U.S. of oil, natural gas, livestock and forest products, while American suppliers of paper goods and financial services, among other things, are likely to increase sales to Canada.

To some extent, Canada will continue to be at the mercy of commodities prices. When the cost of crude oil plummeted last year and drilling activity declined all over the world, unemployment in petroleum-rich Alberta topped 16% before it started to fall again earlier this year. Canada is a major wheat exporter, but global supplies are abundant and prices are depressed. The country is not totally dependent on natural-resource exports. Southern Ontario is a major supplier of parts and vehicles to the U.S. auto and truck industries. Northern Telecom, the manufacturing arm of Bell Canada, sells advanced telecommunications equipment around the world. In the Ottawa area, the government is using tax breaks to help develop a cluster of electronics companies -- a miniature version of California's Silicon Valley.

Though Canadians often talk of boosting exports to Japan and Europe, even the most optimistic politicians and executives realize that their country's fortunes are inextricably tied to north-south commerce. The trade pact should heighten competition between U.S. and Canadian industries, but most companies in both countries seem ready for the challenge -- and opportunity. "Free trade will make us better," says Thomas d'Aquino, president of Canada's Business Council on National Issues. "It will put us on our toes."

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Charts by Cynthia Davis

CAPTION: CANADIAN EXPORTS In billions of dollars

DESCRIPTION: Shows exports from Canada, 1980-1986; color illustrations show fish, pickup truck and oil barrel.

With reporting by Peter Stoler/Ottawa