Market Newsletter : ‘Yukon to Yucatan’ Accord Within Sight : The stakes are different for Canada, the United States and Mexico in the three-sided trading bloc.

This June, the United States, Mexico and Canada are to begin negotiating what’s billed as the deal of the century: creation of a tripartite trading bloc that would make North America a unified economy with an output of $6.6 trillion--enough to dwarf the much-ballyhooed unified market planned for Europe after 1992.

Heads of state in each country are eager to close a deal before their respective national election campaigns begin in earnest--1993 in Mexico and Canada, 1992 in the United States. So optimists are forecasting an early, rough draft of a Yukon-to-Yucatan accord, perhaps by the end of this year.

The main issues at stake are different for each country.

* The United States is especially interested in improved access to Mexican oil, having learned yet one more painful lesson on the risks of overreliance on Middle Eastern sources over the past seven months. (At present, the Mexican constitution forbids any foreign investment in energy.)

* Mexico, with its burgeoning population and embarrassing flight of human capital to the United States, is interested in attracting foreign investment and needed jobs. Mexico is also looking for rewards from Washington for the various free-market reforms enacted since President Carlos Salinas de Gortari took office in 1988.

* Canada, meanwhile, seems to want in for defensive reasons--if the country doesn’t join the talks, its two southern neighbors will press ahead anyway, granting each other favorable trading terms and leaving Canada out in the cold.

There is clearly some ambivalence in Canada.

For years, economists have said that Canada needed to open up to international trade. Manufacturers here had grown inefficient and uncompetitive while long protected by tariffs and other trade barriers. To make up for the shortcomings of its manufacturers, Canada came to depend heavily on exporting its rich, but ultimately exhaustible, natural resources.

Free trade with America might seem the natural course, but for a long time no government would advocate such a step for fear of committing political suicide--Canadians tend to want their governments to keep a distance from the powerful, dominant United States.

But when Canada’s present prime minister, Brian Mulroney, took office, he decided it was time to break with the past and move the country toward trade liberalization. He signed a bilateral trade accord with the United States in January, 1989, telling his country it would lead to the creation of hundreds of thousands of jobs.

In fact, ask people here and they will say the pact has done little for the country. Instead of creating jobs, it looks to him like free trade with the powerful Yankees has cost them. And with an economy that has been mired in recession for much of the time since the pact was signed, the government can offer little proof to the contrary.

Although Canada still posts a strong trade surplus with the United States, economists here say that’s due in large part to stagnant Canadian imports, as recession-stricken consumers and manufacturers have tightened their belts and bought fewer American goods.

There’s no question but that Canadian jobs have disappeared.

But whether the free-trade pact is to blame is unclear. Business people, who generally favor liberalized trade, say the real problem is that the government has kept the Canadian dollar substantially overvalued ever since 1989. As a result, Canadian businesses that ought to be benefiting from their new access to the huge U.S. market are instead finding that would-be U.S. customers cannot afford their overvalued products, they contend.

Others admit that the accord has prompted plant closures and production shifts out of the country:

* Robertshaw Controls Canada Inc., for instance, a subsidiary of a Virginia appliance-controls manufacturer, began shifting production to larger plants in the United States last fall, and said the new free-trade environment helped spur the decision.

* Cobi Foods Inc. closed a vegetable-packing plant in Ontario and likewise cited free trade, among other factors.

* And when Nabisco Brands Ltd. asked for concessions from workers at its cereal plant in Niagara Falls, it blamed new competitive pressures brought on by the bilateral trade accord.

Unionists have little doubt that the free trade pact is to blame, however.

They say that, particularly in Canada’s uncompetitive manufacturing industries, a shakeout has begun as the protective tariffs have been lifted. Bruce Campbell, senior economist at the Canadian Labor Congress, counts 22,000 jobs lost in the textile industry as a result of bilateral free trade, 23,000 in the garment industry, 19,000 in the automotive industry and 22,000 in food processing.

“The job losses . . . will not come back when the country emerges from the recession,” he predicts, claiming that free trade is bringing about “the deindustrialization of Canada.”

There is one area where the trade agreement with America may be helping the Canadians.

The pact provides for special panels to hear the cases of aggrieved Canadian exporters. The five-member panels, composed of both Canadian and American trade experts, hear and resolve disputes within a maximum of 315 days, and so far they have met their deadlines every time.

Before the free-trade accord was signed into law, Canadian companies that had duties imposed on their exports to America had no choice but to go to court in the United States if they wanted to fight back. The court proceedings could take years--and the duty stayed in place all the while.

The panels appear unbiased--in some cases, panels with a Canadian majority have come out in favor of American duties, while in others, panels with a majority of Americans have sided with the Canadian exporters.

“In general, people feel the panels are working very well,” says Amanda DeBusk, a trade lawyer with the Washington office of O’Melveny & Myers. “They’re fair. They’re even-handed.”

The cases decided so far include:

* Pork--The U.S. International Trade Commission accused Canadian pork exporters of dumping low-cost meat in America, and the U.S. Commerce Department began imposing a tariff. In January, one panel ruled that the Commerce Department’s tariff was too high, and the next month another wiped out the tariff completely by finding that the ITC had been wrong in claiming there was any dumping going on at all. Canadians have hailed the pork rulings as a great victory, since Canadian producers ship one-third of their meat to the United States.

* Raspberries--As with pork, America charged Canadian berry producers with dumping, but when a bilateral panel took up the matter, it found that the U.S. Commerce Department had erred in its calculations. When Commerce was ordered to do them over, it found no dumping at all.

* Steel rails--The Commerce Department accused one state-owned Canadian rail manufacturer, Sydney Steel Corp., of subsidizing its products, and another, Algoma Steel Corp., of dumping rails in America. One panel found that Sydney Steel was indeed subsidized, but not to the extent the United States claimed. The duty was reduced. Another panel confirmed that Algoma Steel was dumping rails, and, to the chagrin of Canadians, kept that duty intact.

What next for Canadian trade?

A Gallup poll taken late last year found that 52% of Canadians don’t like the existing U.S.-Canada deal, compared with only 31% who approve of it. And a poll by Decima Research Ltd. found that just 15% of Canadians want both to keep the existing bilateral pact in place and to go ahead with the summer’s trilateral talks with the U.S. and Mexico.

Some Canadian groups are trying to torpedo the trilateral talks.

The Canadian Labor Congress, which had already been calling on the government to rescind the bilateral pact, has now issued a 10-point analysis of the perceived dangers of a continental trade bloc. Like the AFL-CIO in the United States, the Canadian Labor Congress makes much of Mexico’s low wage scale, and the possibility that tough working conditions and scanty benefits there will drag the rest of the continent down toward a “least common denominator.”

The Pro-Canada Network, a vocal coalition of church, labor and other nationalist groups initially formed to fight the bilateral trade accord, is also stumping against a three-way deal. Last year, founder Maude Barlow wrote a letter to Mexican President Salinas, warning him that Brian Mulroney’s promises about the benefits of free trade were empty.

The two main opposition parties in Canada, the Liberals and the New Democrats, have expressed disapproval as well.

Even some business people are worried.

Of particular concern to them is the possibility that a trilateral deal would change the rules for duty-free automobile exports within the continent. For the moment, new cars can cross the U.S.-Canada border duty-free as long as they have 50% North American content. The United States would like to raise the content requirement to 60%, but Canadians fear that the change would mean more of their country’s cars being slapped with duties and rendered uncompetitive in the big American market.

Another common concern here is the no-longer-academic question of Quebec’s separation from Canada; political uncertainty here could weaken the hand of the Canadian negotiators. And they are not in a strong position in the first place. Canada, with an economy one-tenth the size of America’s and little direct involvement south of the Rio Grande, is years behind the United States in trading experience with Mexico. Canada-Mexico trade now amounts to a mere $2 billion--and Canada is in deficit.

Not only that, but economists note that Mexico is ahead of Canada in diversifying its exports and reducing its reliance on the sale of unprocessed raw materials. Mexico already exports a large volume of auto parts, machinery, appliances and other processed goods to Canada. But Canada is heavily dependent on low-tech sales of rapeseed, steel, dairy products, eggs, honey, sulfur, wood pulp and meat to Mexico.

“We sell more dairy products than aircraft to Mexico, more rapeseed than telecommunications equipment,” warned the Globe and Mail in a recent editorial. “Some say that, in the future, Mexico will do the simple, labor-intensive work, while Canada specializes in high-tech, value-added products. That will have to be the future, because it isn’t the present.”

Trade With Canada

CANADA’S BIGGEST EXPORTS TO THE UNITED STATES, BY SALES, 1990:

in billions Vehicles: $26.6 Mineral fuels, oils and products: $10.7 Machinery, boilers, mechanical appliances, engines, parts: $7.6 Paper, paperboard: $6.5 Wood, articles of wood, charcoal: $3.8

UNITED STATES’ BIGGEST EXPORTS TO CANADA, BY SALES, 1990:

in billions Vehicles: $17.3 Machinery, mechanical appliances: $14.8 Electrical machinery, equipment, parts: $8.3 Optical, photo, measuring, other precision equipment: $2.5 Plastic and plastic articles: $2.5

CANADA’S BIGGEST EXPORTS TO MEXICO, BY SALES, 1990

in millions Dairy products, eggs, honey: $62.6 Iron and steel: $56.5 Vehicles: $55.3 Electrical machinery, equipment and parts: $51.8 Machinery, boilers, mechanical appliances, engines, parts: $49.4

MEXICO’S BIGGEST EXPORTS TO CANADA, BY SALES, 1990:

in millions Machinery, boilers, mechanical appliances, engines, parts: $472.5 Vehicles: $348.2 Electrical machinery, equipment: $276 Vegetables: $67.6 Mineral fuels, oils, products of their distillation: $48.8

Source: Statistics Canada