Cross-Border Dispute Over Beer Comes to a Head : Trade: U.S. and Canada impose hefty new duties on each other’s product. The fracas bodes ill for the North American pact.

A long-brewing dispute between Canada and the United States spilled over Friday, as hefty new duties were imposed on beer sold between the two countries.

The beer battle bodes poorly for the North American free trade agreement, a sweeping three-way pact that is supposed to be completed during talks this weekend in Mexico City.

Canada already has a two-way free trade pact with the United States. But that accord has not prevented a string of recent disputes from breaking out over steel, autos, lumber and now beer. The discord in the two-way framework is making Canadians wonder why they should bother getting into the proposed three-way pact.

Washington initiated the latest beer brouhaha, saying Canada was engaging in “discriminatory” trade practices, and announcing that it would slap a 50% duty on all beer imported from Ontario, Canada’s largest province and the home of giants LaBatt Brewing Co. Ltd. and Molson Breweries, as well as several smaller “boutique” breweries.

Ontario beers that are about to become more expensive in the United States include LaBatts’ Blue, and Molson’s Canadian, Golden and Export. Beers from Canada’s nine other provinces--such as Moosehead--will be unaffected.

As soon as Washington made its announcement, Canada retaliated, saying it would charge 50% duties on all beer imported to Ontario by G. Heileman Brewing Co. and Stroh Brewery Co. Canadians will now pay more for such brands as Lone Star, Old Milwaukee and Schlitz.

In Ottawa, Canadian Trade Minister Michael Wilson said his country was singling out Heileman and Stroh products for duty because those were breweries that had pushed Washington to act against Canada. (A number of other U.S. breweries make their beer under license in Canada and, thus, do not export to this country and are not involved in the current spat.)

Deputy U.S. Trade Representative Julius Katz said, meanwhile, that Washington was singling out Ontario because, while the other Canadian provinces were trading in good faith, Ontario was refusing to end what he characterized as discrimination against the American brewers. Katz complained about Ontario’s environmental regulations and its beer-distribution system.

As an environmental measure, Ontario levies a 10-cents-per-can tax on all beer sold in aluminum cans. Since most imported American beer here is sold in cans, while most Canadian beer comes in bottles, the environmental levy hits American brewers harder.

Katz suggested that Ontario’s environmentalist zeal is really protectionism in disguise.

Ontario also requires imported beer to pass through a provincial warehouse before going on to liquor stores. The warehousing adds about $2.20 to the cost of a case. Domestically brewed Canadian beers are exempt.

Katz said that these and other measures have driven the retail price of American beer to $24.35 a case in Ontario, while the same beer can be had for just $10.85 across the border in New York state. “Ontario’s measures all add up to a deliberate effort to protect their domestic beer market by pricing U.S. beer out of the market,” he said.

In a news conference, Marilyn Churley, Ontario’s minister of consumer and commercial relations, contested Katz’s assertions. She said she believes the latest beer furor had come about merely because American brewers are trying to take advantage of the election year. “We all know what election years are like, in any country,” she said. “I think that’s probably the main factor.”

She said Ontario is willing to make certain concessions to resolve the dispute--but that the province will not let the American brewers bypass the controversial warehouses. She said Ontario’s government has regulated alcohol sales since the 1920s as a way of fighting alcohol abuse and other social problems. She said that, because the government provides free health care in Canada, it has a right to place controls on activities, such as beer consumption, that can lead to higher health-care costs.

If beer sales tumble as a result of the higher prices, Canadian breweries will be hurt more than their U.S. counterparts. Ontario breweries ship 17% of their production to the United States, while American breweries ship just 1% of their production to Canada.

“We have a lot to lose,” Churley said. “But we believe we can’t give in to this kind of behavior. The more we give in to it, the more (American exporters) try it.”