Free Trade Means Harsh Adjustments for Canada

THE swiftness of economic change in North America since the United States-Canada free-trade agreement went into effect eight months ago has taken many Canadians, and Americans for that matter, by surprise. In the US, the most visible impact so far has been a flood of activity by Canadian companies in Buffalo, Seattle, and other border areas. Canada, to its disappointment, has experienced no similar burst of activity within its borders by US companies.

On the contrary, the Canadian manufacturing industry is in the midst of a massive restructuring. And it doesn't matter if the factories are owned by Americans, Canadians, or others.

Canadians have noticed a rash of plant closings and consolidations this year. The Canadian Labor Congress, a fierce opponent of the free-trade agreement, says the treaty has already cost 33,000 manufacturing jobs and projects losses of thousands more over the next couple of years.

The Canadian government has no official estimate of jobs lost in plant closings.

Pro-free-trade groups argue that many plants would have closed anyway because of their inefficiency.

Some analysts, noting that major regional linkages in the North American economy are north-south rather than east-west, say that restructuring in Canada has a US model: The deindustrialization of the American Northeast and Midwest in the 1960s and '70s, when industry was lured en masse by southern and border states featuring low unionization, low wages, low taxes, and plenty of special incentives.

``The US-Canada free-trade agreement is really living up to all the fears we have had about it,'' says Arthur Kube, an analyst for the Canadian Labor Congress. ``We are expecting thousands or more job losses over the next couple of years in the sunset industries of furniture, textiles, and food processing.''

Canadians were comforted during the free-trade debate by the protection provided by the Auto Pact that went into effect in 1965 and continues under the free-trade agreement. There are about 140,000 Canadian auto workers - a large number for a country whose population is one-tenth the size of the US.

The auto industry is ``a very large part of the Canadian economy,'' says John Britton, an industrial geographer at the University of Toronto. ``So if it founders, or if the `transplants' squeeze it, Canada hurts badly.''

Many analysts say that the hope for growth in manufacturing jobs lies in Canada's small- and medium-sized manufacturing businesses, its resource-based global multinationals, and in changes in the way in which US companies run their branch plants in Canada.

Alan Rugman, head of the Ontario Center for International Business, believes that Canada will come up with its own version of economic restructuring that will make it economically stronger than the US northeast.

He predicts a competitive 21st-century Canadian economy based on a core of two dozen conglomerates, 16 of which are based on resources, heavily in mining and timber. ``No other industrialized nation has the intensive natural resources that Canada has, and as we move into a global economy, they will become all the more important.''

The hope of mid-sized companies, says Mr. Britton, lies in the development of niche markets to replace those that will be lost as the protection offered by tariffs disappears. ``Instead of producing middle of the line furniture, for example, a company may have to find a specialty such as boardroom furniture,'' says Britton.

US branch plants are by far the most important elements in the Canadian manufacturing economy. So whether or not they produce in Canada for a combined North American market is critical.

``Before free trade, it would have been too expensive to produce for the US market in Canada,'' says David Elliott, Proctor & Gamble's associate director of international trade. ``We are now producing fewer products with longer production runs in two of our older Canadian plants. This makes it more cost-effective to produce for the total North American market.''

Britton and other analysts see Canada's great economic strength as the quality of its work force.

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