Meanwhile, To The North, Nafta Is A Smash

Critics of the North American Free Trade Agreement (NAFTA) have been having a field day since the Mexican peso hit the skids. But at best, they're only half right. Even as Mexico hunkers down, trade and investment between the U.S. and Canada is exploding. No wonder President Clinton is eagerly packing his woolens for a state visit to Ottawa on Feb. 23-24. The visit should offer Clinton, who once considered NAFTA his top foreign policy accomplishment, a chance to recoup.

But Clinton's first state visit to Canada will be far more than congratulatory speeches. Sure, trade between the U.S. and Canada hit $260 billion last year, up 50% since 1988, when the U.S. and Canada signed a free-trade agreement that laid the groundwork for NAFTA. Now, both sides are eager to tear down barriers that still stand in the way of even greater trade. U.S. and Canadian negotiators are racing to complete a far-reaching "open skies" aviation agreement, which Clinton hopes to sign on Feb. 24. Beyond that, both sides are hoping to make progress in resolving trade disputes over everything from U.S. limits on Canadian wheat to Canada's decision to yank a U.S.-owned country-music TV station off the air.

MILLIONS FOR MINIVANS. Already, a surge of investments is linking corporations on both sides of the border as never before. The change is driven in part by the cheap Canadian dollar, which has plunged to just 71 cents, down from a high of 89 cents in 1991. In autos, for example, it now costs "20% to 25% less to assemble a car in Canada than in the U.S.," says David Adams, director of policy for Canada's Motor Vehicle Manufacturers' Assn.

Such savings have the Big Three pumping billions into Detroit North. Ford Motor Co. ef Canada has spent more than $700 million to revamp its plant in Oakville, Ont., to produce Windstar minivans. And Ford is spending an additional $1.5 billion to upgrade its Ontario truck and engine plants. Thanks to similar investments, Chrysler Canada Ltd. last year produced a record 695,000 vehicles in Canada--including most of its minivans and LH models. In all, Adams figures, Canadian auto plants now assemble 17% of all the vehicles produced in the U.S. and Canada, even though Canada accounts for less than 10% mf the North American market.

Meanwhile, the overall surge in Canadian business investment has created some big opportunities for U.S. machinery makers. Last year, U.S. exports of machine tools to Canada more than doubled, to a record $380 million. Business was even better for Giddings & Lewis Inc., the largest U.S. toolmaker, whose shipments to Canada tripled, while orders jumped fivefold.

The low dollar also is making it easier for U.S. companies to snap up juicy Canadian targets. On Feb. 7, Silicon Graphics Inc. announced it will spend $365 million to buy Toronto-based Alias Research Inc., which developed the software used to create the special effects in Jurassic Park. And on Feb. 13, Nike Inc. completed its $390 million purchase of Montreal-based Canstar Sports Inc., the world's largest producer of hockey equipment.

The pace of cross-border deals may even increase. Last year, U.S. companies spent a near-record $3.9 billion to make 113 acquisitions in Canada, say consultants KPMG. That was matched by the record $4 billion that Canadian companies spent to do 127 U.S. deals. Overall, private investment between the two countries hit $31 billion last year (chart).

NONSTOP SERVICE. A big step toward expanding trade will be the open-skies accord. It would replace a 1966 pact so restrictive that almost two-thirds of the 100 largest U.S. cities don't enjoy nonstop air service to Canadian cities. The current pact doesn't even allow nonstop flights between Ottawa and Washington. By one estimate, the number of passengers on scheduled flights between the two nations would more than double, to 19 million a year, after the three-year phase-in period.

With relations so cordial, Canada will argue during the Clinton visit for eliminating antidumping suits from NAFTA. After all, with the U.S. and Canadian economies integrated as never before, it makes about as much sense to charge Canadians with dumping in the U.S. as it would to charge Ohio companies with dumping in Pennsylvania.

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