Separation Anxiety : An Economic Debate Rages as Vote Looms on Quebec Independence

If Quebec’s voters decide in a referendum election Oct. 30 to launch their province toward independence from Canada, would they also be taking the fast track to bankruptcy? And would they drag the rest of Canada down with them?

Montreal clothing manufacturer Alvin C. Segal considered these questions the other day as he contemplated the latest poll showing the election in a dead heat. “I’m feeling very uncomfortable,” he said. “I have my life invested here.”

Seven years ago, anticipating the lowering of trade barriers between Canada and the United States, “we mortgaged ourselves to our eyeballs,” as Segal put it, and financed a huge expansion of Peerless Clothing Inc., the company founded by his family in 1919.

It paid off spectacularly. Peerless went from the edge of oblivion to one of the largest makers of men’s suits in the world.

Thanks largely to the North American Free Trade Agreement and its predecessor, the 1988 free-trade deal between Canada and the United States, Peerless sells about 97% of its merchandise in the United States, mainly as private-label clothing in department stores. The factory employs 2,400 people.

But if Quebec separates from Canada, the newly created nation would probably have to drop out of NAFTA, at least temporarily. It would need to negotiate new trade terms with Canada, the United States and Mexico, and Segal wonders if an economically vulnerable Quebec government could resist his U.S. American competitors, who would like to cut back on the number of suits he’s allowed to ship south.

Segal fears that business could go from boom to bust virtually overnight. Other voters--and investors--here share his concerns.

The debate over Quebec separatism has its roots in efforts to preserve the language and culture of the French-speaking province amid its English-language surroundings. But this campaign has largely been fought using arguments of the economic risks of separation.

No one knows exactly what would happen if Quebec votes to go its own way. Most economists who have studied Quebec agree it would be an economically viable independent state. But they say that separation runs at least a short-term risk of recession, high interest rates, devalued currency and a lowered standard of living. Quebec’s prospects would vary depending on the reaction of financial markets and the political response of Canada, the United States and other countries, according to analysts.

And any economic disruption caused by the breakup of Canada, the United States’ largest trading partner, would inevitably reverberate south of the border.

“Americans can ill afford to underestimate the seriousness of the issues . . . for the United States if Quebec votes to become independent of Canada,” warned an analysis published last week by the Canada Project of the Center for Strategic and International Studies in Washington.

Fears that Quebec will indeed vote for independence rocked Canadian financial markets Monday with publication of polls showing that separatists have edged ahead of the federalists.

The Canadian dollar, which traded last week at nearly 75 U.S. cents, took a large one-day tumble to slightly more than 73 cents. The Toronto Stock Exchange also quavered as its composite index lost about 2.8% of its value. Nationwide banks were hit especially hard.

“That’s what you call political instability,” said Prime Minister Jean Chretien, in New York for the 50th anniversary ceremonies for the United Nations. “It will be a lively week.”

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On election day, Quebec’s 5 million voters will be asked whether the province should become “sovereign.” But the ballot question also calls on the Quebec government to try to work out a trade and political partnership with the rest of Canada before actually declaring independence. Canadian officials have indicated they would not be interested in the kind of partnership the separatists are pitching, and no one knows exactly what would happen the day after a yes vote.

Both sides are seeking to sway crucial undecided voters.

Canadian federalists, led by Chretien and Quebec Liberal Party leader Daniel Johnson, warn that separation would plunge Quebec into an economic abyss and cost as many as 92,000 jobs.

Separatist leaders Lucien Bouchard and Jacques Parizeau accuse the opposition of scare tactics, and dismiss out of hand any economic risk associated with separation. They argue that it is in both sides’ economic interests to reach a post-separation accommodation on such issues as trade, currency, division of government debt and open borders, and that once emotions die down, talks on such subjects will begin--perhaps encouraged by the United States.

Americans have more than a neighborly interest in all this. U.S.-Canadian trade in goods and services exceeded $295 billion last year, making it the most prosperous two-way relationship of its kind in the world. About $34 billion of that trade is with Quebec. U.S. investors, including pension funds and other institutions, have stakes in Canada and Quebec bonds.

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While the opportunity to negotiate new trade agreements with Quebec might offer some potential negotiating leverage, the United States seemingly has little to gain from a Canadian breakup.

An extended economic downturn in Canada would be felt directly in the Midwest and Northeast, where trade ties are strongest. With the current economic troubles in Mexico and Japan, a Canadian recession would mean the three countries that buy half of all U.S. exports would be in trouble.

Though the U.S. government is officially neutral, American officials have made clear their preference for the status quo. Last week, Secretary of State Warren Christopher met with Canadian Foreign Minister Andre Ouellet in Washington and stressed “the high value we place on the relationships that we have with a strong and united Canada.”

President Clinton made similar statements during a visit to Ottawa in February, to the visible annoyance of Bouchard.

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Nationhood, Eh?

Separatists strongly disagree, but some economists, trade experts and political commentators in Canada and the United States paint this picture of an independent Quebec.

Quebec would be one of the most indebted industrialized nations. Its ratio of debt to gross domestic product would be between 108% and 139%, similar to those of Italy, Belgium, Israel and Greece.

Quebec would have to renegotiate membership in the North American Free Trade Agreement, the World Trade Organization and other treaties--from a weak bargaining position.

The nation would collect the taxes that now go to the federal government, but it would lose all federal funding. It would also start paying for national defense and other services taken over from Canada.

The Canadian dollar would probably plummet in value, creating upward pressure on interest rates throughout Canada.

Tens of thousands of residents and hundreds of businesses might leave Quebec, as they did in the late 1970s when separatism was proposed. This could be exacerbated by Canadian refusal to recognize dual Quebec-Canadian citizenship.

The Quebec government’s independence program calls for continued use of the Canadian dollar, even though that leaves monetary policy with the Bank of Canada. Some predict capital flight would force Quebec to issue its own, devalued currency.

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JOBS

The unemployment rate in Quebec consistently exceeds that of Canada as a whole.

Quebec 10.9%

Canada 9.2%

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TRADE

U.S.-Canadian trade has climbed in both directions because of the North American Free Trade Agreement. But separatism would force Quebec to negotiate its own trade accord with the United States and Mexico, which worries businesses in both countries. U.S. trade in goods with Canada, in billions of dollars:

U.S. exports to Canada $114.4 U.S. imports to Canada $126.4Sources: Statistics Canada, U.S. Commerce Department, Researched by ANDREW VAN VELZEN / Los Angeles Times

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FRACTURED NATION?: Possibility grows that Quebec separatists could win. A1

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