The U.S. Can't Afford To Nickel And Dime Canada

Lots of people agree that there ought to be a North American Free Trade Agreement. The pact would do wonders for the region's ability to compete with Japan and Europe by removing most restrictions on goods and services moving between the U.S., Canada, and Mexico. The result? The world's largest common market, a North America Inc. with a $6 trillion gross regional product.

But now, just as free-trade talks with Mexico have brought the pact within reach, Washington seems to be losing the spirit needed to make the agreement work. In recent weeks, the U.S. has instigated some nasty trade battles with Canada, its largest trading partner. The moves reflect the rising protectionist fires in Washington, fueled by the Presidential campaign and Pat Buchanan's unrelenting "America First" message. But the tension also is jeopardizing Canadian support for the 1988 U.S.-Canada Free Trade Agreement--the cornerstone of any North American free-trade plan.

`PURE POLITICS.' The latest dispute--over Canada's softwood lumber exports to the U.S.--illustrates justhow sharply U.S.-Canada trade relations have deteriorated. On Mar. 6,the U.S. Commerce Dept. issued a preliminary finding that Canada subsidizes its lumber exports and required Canadian producers to post a bond to cover the 14.48% subsidy. That amounts to some $350 million a year. Canadians are furious. Even Prime Minister Brian Mulroney, a staunch free-trade supporter, called it "vexatious harassment" stemming from "pure politics." On Mar. 10, he called a Cabinet meeting to discuss retaliation.

What makes this so unfortunate is that the U.S. case is so weak. Canada's share of the U.S. lumber market actually has fallen from one-third to 27% since 1986, when the U.S. last challenged Canadian timber subsidies and Canada agreed to balance the scales with new taxes and charges. On this go-around, Commerce is primarily challenging British Columbia's decades-old policy of prohibiting raw log exports. But the same policy is in place in the U.S.'s Pacific Northwest--just across the border.

The lumber decision follows another questionable jab at Canada, the U.S. Customs Service's Mar. 2 ruling that Honda Civics made in 1989 and 1990 at Honda Canada's plant in Alliston, Ont., don't have the 50% North American content required by the free-trade pact. That decision meant the cars are subject to a retroactive 2.5% duty.

NO-GAINER. Americans are justifiably angry about their huge trade deficit with Japan. But if the U.S. was swinging at Japan, the punch landed on Canada. The Honda ruling was issued despite a dispute over how to define content: Canada argues the Civics easily qualify for duty-free treatment.

Washington's message to Honda and other Japanese investors is that it is safer to invest in the U.S. than in Canada. And that violates Canada's implicit understanding that it is entitled to a share of foreign investment in North America Inc.

Little wonder, then, that Canada is challenging both of these rulings. Canadians believe they will prevail. But the process could take months, and the political damage is already done. Most Canadians avidly follow trade issues, and most now believe it's time to renegotiate or repudiate the free-trade pact.

By going after Canada on cases such as Honda and lumber, the U.S. stands to lose far more than it can gain. If it wants to regain some of its enormous losses to Japan, Washington needs Canada and Mexico as strong partners. If it's smart, the U.S. will start treating them accordingly.

by William C. Symonds

Before it's here, it's on the Bloomberg Terminal.