Canada’s Trade-off Trouble: How to Prosper and Protect?

<i> Kenneth Freed is The Times' correspondent in Toronto</i>

Canadians often want it both ways in their dealings with the United States.

They want Washington to carry the financial, manpower and equipment load for their defense, yet they demand unfettered freedom to criticize American foreign and defense policy. They rage against the invasion of American investors while such Canadian firms as Seagrams and Cadillac-Fairview make major forays into the American market.

This attitude--having their cake and eating it--is evident as Canada readies for negotiations with the United States on a new trade agreement.

Understandings reached last March between President Reagan and Prime Minister Brian Mulroney call for the two countries to start new trade talks this year, perhaps as early as fall.

Canada is already the United States’ largest trading partner, with two-way business totaling $120 billion a year. About 80% of all Canadian exports go south; the Canadian trade surplus with the United States is $20 billion, second only to Japan’s--and 1,000% higher than it was only a couple of years ago.


Since customs duties are imposed on only about 10% of the goods that cross the border, the major reasons for the imbalance are non-tariff barriers, largely imposed by Canada, and the strong U.S. dollar making Canadian goods cheaper in the United States.

Yet many Canadians want more. At least, they want guaranteed access to the U.S. consumer at a time when American protectionist sentiment mounts.

A royal commission headed by former Finance Minister Donald MacDonald issued a controversial report last week calling for free trade with the United States, saying that there is little option if Canada expects to maintain itself as a growing, prosperous and modern economic power. MacDonald warned that if negotiations do not start soon, Canada may find itself victimized by growing protectionism in the United States.

But large and influential elements of Canadian life are either opposed to or exceedingly wary of any new two-way free trade arrangement that would open their borders to more American products.

Sharing this concern are the two national opposition parties and the ruling party in Canada’s richest and most populist province, Ontario--plus important labor, business and cultural leaders.

They decry a perceived economic overdependence on the United States, saying that free or freer trade with the giant to the south will not only destroy local industry but erode Canada’s political and cultural identity. Canada, they say, will end up as a mendicant at the mercy of a country with no particular interest in Canada’s welfare or identity.

This argument has such a powerful emotional pull that even MacDonald said some areas of the economy--he specifically mentioned agriculture--should be excluded from the talks. He also said some issues touching on Canada’s cultural and political identity should be removed from the negotiations, such as the power to restrict American media intrusion.

Now, with Parliament back in session after a long summer recess, opponents of free trade intensify their efforts to build public support in hopes of frightening Mulroney, a man known for acute concern about his image and popularity.

When Mulroney was running in last year’s election campaign, as leader of the Progressive Conservative Party, he spoke of the need for free trade with the United States in order to create new jobs, attract new investment and increase opportunities for the Canadian consumer. But in recent weeks, Mulroney has stopped talking about “free” trade, substituting “freer” trade or “enhanced” trade.

The last time free trade was seriously raised, in 1911, the party that proposed it was defeated, a defeat so devastating that until now, no serious politician could afford to espouse it. But free trade has come up again because it had to come up.

The basis of Canada’s wealth over the past half-century is disappearing. Like many countries dependent on exporting natural resources to support a costly social welfare system, Canada is in trouble. There is a shrinking market for many of its resources and competition increases. So does the cost of paying for the welfare system and providing the subsidies that prop up much of Canada’s industry.

Canada’s national deficit is proportionately higher than the U.S. deficit--and growing. So is the amount of money taken away from productive uses to pay the growing federal debt.

Because Canada has paid little attention to modernizing industry or new technologies (a recent study placed Canada eighth among the eight leading industrial nations in development of high-tech industries), it has suffered a serious loss of scientists and technicians who fled to the United States for jobs and opportunities.

Thus Canada has come, albeit unwillingly, to a crossroads. Even opponents of free trade acknowledge that something has to be done. They have proposed everything from looking for new overseas markets to building Canada’s own trade barriers even higher to create new domestic industries and markets.

But Canada has only 25 million people, far too few to maintain--in isolation--the kind of economy capable of supporting the high standard of living now enjoyed. And previous attempts to find new customers as U.S. replacements have failed.

This leaves Canada facing a crucial decision: accept some sort of free trade with the United States or slowly lose the ability to maintain present comforts and grow. Canada must realize that if it eats its cake, it’s going to be gone. If it wants to keep its share of the American market, it will have to remove barriers to American traders even if this changes the shape of some institutions and traditional policies.

Proponents and opponents of free trade agree on one thing: Whatever the outcome of the debate, Canada is about to become a far different place.