Canadians weigh consequences of scuttling trade deal with US. Free-trade supporters warn of decline in dollar and US retaliation

What happens if the Canada-United States free-trade deal goes down the drain in Monday's national elections? ``The immediate effect in Canada would probably be a sharp drop in the value of the Canadian dollar, a correspondingly sharp increase in Canadian interest rates, and a greatly increased risk of recession,'' according to the Royal Bank of Canada.

Already the value of the Canadian dollar has bounced around with the shifts in the polls. When support for the Progressive Conservative government of Prime Minister Brian Mulroney increased, the dollar went up. When the polls showed greater backing for the opposition Liberal Party, which promises to tear up the deal if elected, the dollar went down on foreign exchange markets. Share prices on the Toronto Stock Exchange also dropped when the prospects of Liberal leader John Turner improved in the polls.

``Investors are already telling you, on the money and stock markets, what they think of Mr. Turner,'' Mr. Mulroney said Monday.

Conservative officials have also warned that the US would likely reopen the popular 1965 auto agreement, which provides for duty-free trade in motor vehicles and parts, should the free-trade pact be scuttled. They speculate on further protectionist trade measures by American business interests.

``The United States will be bound to reopen it [the auto deal],'' says Washington trade consultant Julius Katz.

Jane Little, an economist with the Federal Reserve Bank of Boston warns that collapse of the agreement may not result in a return to the status quo. ``In a possibly strained, resentful atmosphere, the cycle of trade frictions, contingent protection and retaliation which led up to the free-trade negotiations could well begin again with a new vigor. The resulting uncertainties would be greater than before.''

But the Liberals argue this won't happen. Lloyd Axworthy, a prominent Liberal free-trade critic, says US politicians ``are not going to be silly enough to start retaliating in a way that would disrupt what is a very good trading relationship.''

Some 24 percent of Canada's national output is involved in trade with the US. One Canadian in four is affected. Canada is also the largest export market of the US. But only 2 percent of the US gross domestic product moves across its northern border, and only one American in 50 is involved in that trade.

Many Canadians speculate that Turner would seek to renegotiate the pact, should Mulroney's government be replaced by a Liberal government or a Liberal-New Democratic Party coalition. But leading Liberal politicians say that renegotiation of the trade deal is not on their agenda, though according to a recent poll, many Canadians would prefer that to scuttling the pact.

Thus a new government's only feasible alternative for opening up world markets to its exports may be the current round of multilateral negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT). If successful, that round will reduce trade barriers on a world-wide basis, with no favoritism, rather than just between the US and Canada.

That would delight Mitchell Sharp, a senior politician who has held key Cabinet posts in past Liberal governments. Mr. Sharp charges that the free-trade deal ``will ultimately, over time, result in the very rapid Americanization of Canada.'' Business executives on both sides of the border will advocate harmonization of tax laws and regulations that affect their companies, he says.

The former minister of finance, commerce, external affairs, and deputy prime minister holds that pressures will build for Canada to harmonize its tariffs against third nations. ``Decisions will then be made in Washington as to external tariffs,'' he says. Harmonization will not occur to the same extent if freer trade arrives under GATT global agreements, he maintains.

Another well-known critic of free trade, John Halstead, has similar fears, saying that free trade could evolve toward monetary union, economic union, and even political union.

He admits that the room for maneuver which any government can exercise in an interdependent world is limited. This freedom of action is more severely limited for Canada because of its high dependence on foreign trade, its geopolitical location in North America, and its strategic location between the US and the Soviet Union.

A basic feature of Canada's relationship with the US, its most important external relationship, is the enormous disparity, both of power and of information and knowledge about each other. The population of the US is 10 times that of Canada, its national output 11 or 12 times greater. Canadians know far more about the US than vice versa.

These differences means that the impact of the US on Canada is ``out of all proportion'' to the reverse impact, says Mr. Halstead, now a professor of international affairs at both the University of Windsor in Canada and Georgetown University in Washington. ``This asymmetry is the most single difficult factor in the management of our relations with the US.''

Canadians have had to pay a price for their political and cultural identity, Halstead continues. He feels free trade would indicate Canadians no longer want to pay that price. Canada would give up the bargaining and policy levers it has to control continuing integration with the US, such as programs to aid regions and industries.

``There is a difference between being involved in a process and being committed to it,'' he says. ``It is like a plate of ham and eggs. There the chicken is involved, but the pig is committed. Do we want to be the chicken or the pig?''

Next: Canada's more generous social welfare system.