Mulroney's dimming election prospects have Bay Street worried

Bay Street, Toronto's financial center, is more than a little concerned by the prospect that the ruling Progressive Conservatives might lose Canada's election. The dollar has dropped almost 2 cents against the American dollar in a week, stock markets are skittish, and even the real estate market has gone soft since Liberal leader John Turner shot up in the polls after a television debate with Prime Minister Brian Mulroney.

Mr. Turner says he will rip up the free-trade agreement with the United States if he wins the Nov. 21 election.

``A Liberal government tearing up the free-trade deal would cause a `made-in-Canada' recession,'' says Patricia Croft, an economist with Burns Fry Ltd., a Toronto-based investment dealer. ``That would mean a dollar that could be 10 cents lower quickly, forcing up interest rates by as much as one percentage point and producing higher unemployment.''

Michael Wilson, Canada's minister of finance, said in a speech this week that if Canada canceled the free-trade agreement, the United States might well do the same with the auto pact, the 23-year-old agreement that allows auto parts to cross the Canada-US border without tariffs.

Although both Turner and New Democratic Party (NDP) leader Ed Broadbent described such statements as scaremongering, Mr. Wilson said the auto pact could be reopened on six months' notice and canceled on one year's notice. He said the governors of 12 auto-producing states say that if there is no free-trade agreement, they want changes to the auto pact.

The free trade in auto parts has been advantageous to Canada, particularly with its lower dollar. A car part can be made for 81 cents in Windsor, Ontario, and sold for a dollar one mile away in Detroit. Cancellation of the auto pact would hurt the economy of Ontario, Canada's richest industrial province.

What started all this was the television debate last week in which Turner passionately attacked the free-trade agreement. Turner was seen as winning the debate, and his party's standing has been moving up from No. 3 in the polls. The result could be a minority Liberal government with support coming from the ultranationalist NDP. That has the business community anxious.

``Free trade has been the catalyst for foreign investment flowing into Canada over the past several months,'' a senior banker said. ``Without free trade, I'm afraid the focus will turn to our huge balance-of-trade deficit.''

``All of this spells the worst of all possible worlds,'' Ms. Croft says. ``A deteriorating budget deficit, higher unemployment, and recession. And a made-in-Canada recession would be a first; Canada usually follows the US economy.''

There are economists and businessmen who disagree. Michael Vaughan, a communications executive, is amused that Bay Street is so afraid of John Turner, who, until he returned to politics, was one of their own as a top corporate lawyer in an establishment firm.

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