Ghost of Trade Wars Past Haunts U.S.-Canada Talks

No one much remembers Willis C. Hawley these days. But the shade of the late Oregon congressman looms darkly over Canadian-American relations, threatening not only the world’s most lucrative trade arrangement but even global trade patterns.

In 1930, with the seemingly innocent act of introducing a bill in the U.S. House of Representatives to protect Oregon’s lumber industry against Canadian exports, Hawley set off a chain of events that wrecked the international trade system and helped plunge the world into the Great Depression.

His bill attracted hundreds of amendments in both houses of Congress and was transformed into the Smoot-Hawley Tariff Act, which led to a global trade war that destroyed economies all over the world.

Nobody is predicting a repetition of that disaster, but the United States and Canada are halfway through negotiations on a free-trade agreement, and, if they fail economic and political relations between the two countries will be severely affected. And efforts to reform the international trading system will be set back sharply.

After nearly six months of talks, the signs are not promising. Under a schedule agreed to at the outset, Congress must have the agreement in hand by next October, but the negotiators have yet to announce a substantive agenda.

“We’re still fact-finding,” Peter Murphy, the chief American negotiator, said recently.

As delegates go through the mass of data and the many political considerations that are clogging the process, the Hawley ghost lingers on in the form of tit-for-tat restrictions on trade. These do not yet constitute a trade war, but they are certainly skirmishes. Ominously, these “irritants,” as the negotiators call them, deal with Canadian lumber exports to the American Northwest.

American officials are worried that Prime Minister Brian Mulroney--in the face of emotional opposition from his political opponents and from Canadian business interests that fear they will lose out to increased U.S. competition under a free-trade agreement--is losing his nerve and his commitment to reaching an agreement.

Canadian officials, for their part, doubt that their American counterparts understand or care about special conditions and sensitivities important to people north of the border.

The stakes are high. Cross-border trade amounts to $145 billion a year and provides employment for 4 million people. It is the largest trading relationship in the world, and each of the two countries is the other’s No. 1 trade partner.

For Canada, the U.S. trade is, in fact, life-supporting. More than 30% of the Canadian economy is dependent on overseas sales. Of Canada’s total exports in 1985, which totaled $87 billion, 78% went to the United States.

The importance of this trade to the United States is underlined by the fact that Canada buys about 25% of all U.S. exports, 10 times the amount of American goods purchased by Japan, the United States’ No. 2 trading partner.

The 9 million people of the province of Ontario buy more U.S. products than the 200 million-plus people of the five largest countries of Western Europe.

The idea of free trade between Canada and the United States, or some form of economic union, is more than a century old, but efforts to bring it about have generally failed because of internal political problems, first in the United States and more recently in Canada.

The latest attempt at free trade began when President Reagan, early in his first term, called vaguely for integrating the North American economy. Then Mulroney, in the course of his 1984 political campaign, promised to seek a better trade relationship with Washington. The two leaders set the process in motion at a meeting in March, 1985, and preliminary talks opened last May.

Removal of Barriers

Both sides say they have the same goal: to guarantee and expand trade by removing the tariffs and other trade barriers that still exist.

Canada now levies tariffs that average nearly 10% on about 20% of the American products it buys; the United States levies tariffs that average less than 5% on about 15% of what it buys from Canada.

Canada also wants to be exempt from American regulations and laws that provide for countervailing tariffs, which are aimed at offsetting subsidies and dumping practices that are found to put U.S. producers at a competitive disadvantage.

William Bennett, the former provincial premier of British Columbia and one of the strongest Canadian advocates of free trade, said in an interview: “I know of no one who will support it (a new agreement) without removing the countervails, because there will be no stability. You will have to exempt Canada.”

For the Americans, the major goal beyond removing tariffs is to end Canadian subsidies on competitive goods--to create a level playing field, as U.S. officials put it.

It sounds complicated, and it is. Not the tariffs--officials on both sides expect an almost complete phase-out of tariffs over a 10-year period, with protection for the affected sectors. The problem is non-tariff barriers--and most of the concern is on the Canadian side.

For instance, the American call for a level playing field means to the Canadians a threat to their extensive government social welfare system, which allows businesses to cut costs by not having to pay expensive medical and pension premiums.

Even the national unemployment insurance program could be endangered, according to such opponents as Lloyd Axworthy of the opposition Liberal Party. By paying jobless benefits to such seasonal workers as fishermen, Canada is seen as unfairly subsidizing the fishing industry, Axworthy says.

U.S. negotiating positions are also viewed as threatening Canada’s cultural identity because they could bring an end to tax laws that limit access to Canada by American broadcasting and publishing interests.

Axworthy even argues that further integration of the two economies, and a resulting increase in Canadian dependence on the United States, would draw Canada into serfdom, with no room to deviate from Washington’s foreign policies.

Imbalance Favors Canada

American concerns are fewer but crucial. One involves reopening a 20-year-old agreement providing for limited free trade in automobiles and other vehicles. This agreement has resulted in a lopsided trade imbalance in Canada’s favor, and the Americans want it renegotiated.

But what particularly bothers the Americans is the Canadian demand for elimination of countervailing duties or Canada’s exemption from them. Murphy, the American negotiator, said in a speech last month in New York that “while we won’t rule out anything, including changes in U.S. procedures, we’re not saying we will” rule out anything.

Thomas M. T. Niles, the American ambassador here, recently told a Canadian audience that there is no chance of giving up procedures to protect U.S. businesses against unfair foreign competition.

The Americans hold to this tough position because of growing protectionist sentiment in the United States--particularly in the Senate since the November elections gave control to the Democrats, many of whom campaigned on protectionist issues.

“Obviously this is one of the most difficult issues for us to address,” Murphy told his New York audience of international business figures. He said that with Congress going against the free-trade policies of President Reagan, “we’re going to have to have something that is very attractive to us. . . . It depends on what Canada is prepared to do.”

At the moment, American officials are worried that beyond the details of the negotiations, a budding obstacle to an agreement is a perceived failure by Prime Minister Mulroney to control the debate in his country.

“I don’t doubt that he wants an agreement,” said a U.S. official who is close to the talks, “but I think he was taken aback by the level of protectionism in the United States. And he is hurt at home because he doesn’t have an agreement in hand and is open to general attacks he can’t answer specifically. Mulroney has to show he can handle it better than he has. He must be more aggressive.”

Although Mulroney has said that an agreement is necessary to future Canadian prosperity, he has said repeatedly that he will never give in to demands that would weaken Canada’s identity, independence or sovereignty. He has sought to minimize the emotion caused by the debate, saying he wants not free trade but “freer trade” or “enhanced trade.”

Some of his aides have been saying privately that he will be quick to distance himself from the United States if free trade begins to look like a political loser.

Public opinion polls show that 55% of Canadians still favor a free-trade agreement, but this is considerably lower than the approval level of a year ago. Also, a recent poll conducted by the Edmonton Journal indicated that 50% of the people do not have enough information to make a decision.

Convincing people in both countries has not been made any easier by the budding trade conflict. In recent months American businesses have filed 66 petitions with U.S. government trade agencies asking for countervailing duties against various Canadian businesses charged with unfair trade practices.

These petitions have resulted in a 35% tariff on Canadian exports of cedar roofing and siding shingles and a temporary tariff of 15% on softwood lumber. The last Congress also ordered a “user charge” on everything imported by the United States--costing Canadian exporters millions of dollars.

Canadians have retaliated by placing a 10% duty on imported English-language books, most of which come from the United States, and a 67% countervailing duty on American corn because of alleged U.S. government subsidies.

Each side has accused the other of taking unjustified action. Canadian Trade Minister Pat Carney said that “these actions certainly impede the process” toward a trade agreement.

What happens if the two delegations fail to get an agreement before the Jan. 3, 1988, deadline set for final approval by both governments? In Murphy’s view, the best that could be hoped for is that failure would be regarded as “a lost opportunity” on both sides--for Americans to expand their markets by 10% and for Canadians to increase and guarantee access to a market that means life or death to their economy.

Worst-Case Scenario

The worst, Murphy said, would be a situation where “things eventually slide backward,” with Canada having no place to go. Citing Canada’s failures in the past to ease its dependence on trade with the Americans by increasing exports to Japan, the European Communities and the Third World, Murphy asked: “Was that a useful exercise?”

Canadians must realize, he went on, that any agreement “will have to benefit the United States.”

Chances of getting an agreement, Murphy told a television interviewer last month, are “50-50 at best.”

Both sides say that failure of the talks would be devastating to world trade, not only because it could set off an economic war between the United States and Canada but because it would likely doom multinational efforts to reform and update agreements governing global business.

“If the United States can’t reach an agreement with its largest trading partner and closest ally, the rest of the world isn’t likely to trust its ability” in multinational talks, said a high-ranking American trade official who asked not to be identified.

He was referring to negotiations on the General Agreement on Tariffs and Trade, now under way, in which the United States is seeking greater and cheaper access for such non-manufactured items as banking and computer services.

“The GATT simply won’t accept American plans for greater access for its services if these (free-trade) talks break down,” a Canadian trade expert said. “That would lead, no doubt, to American retaliation, and then retaliation against America, and we would be back to Smoot-Hawley days.”

This dour assessment is shared, surprisingly, by some U.S. congressmen.

“I don’t think we realize how close we are to repeating history,” said a Democratic congressman who spoke to a New York meeting under ground rules that prevent the use of his name. “We should all remember Smoot-Hawley, which started as a single effort to protect Oregon lumber from Canada.”