UNITED States Trade Representative Carla Hills doesn't understand what all the fuss is about, but Canadian trade officials remain adamant: Canada will back out of the North American free-trade talks unless its cultural industries are protected.The talks, which cover a wide range of trade issues, got under way this summer in Toronto. But fear is already being expressed in Canada that the government will cave in to American pressure to open its cultural industries to US media companies hungry to gain a stronger foothold in Canadian publishing, recording, radio, and television. "My concern is the US wants to turn our country into what they always thought it was, an extension of the United States," says Harold Greenberg, chairman of Astral Inc., a Montreal pay-television and production company that promotes Canadian productions. Canadian cultural industries are already controlled to a large extent by US companies. American interests control 93 percent of Canada's movie and video business, 90 percent of the recording industry, 92 percent of book publishing, and receive about $350 million a year from television and program sales in Canada. To protect what's left of its cultural industries, the Mulroney government insisted that safeguards were written into the 33-month-old US-Canada free-trade pact. But Washington is now insisting the protected film, book, and television industries be on the bargaining table in the negotiations between Canada, Mexico, and the US. "By no means do we accept the argument that there should be an exemption for culture on the trading scene," Mrs. Hills said recently. "Believe me, if what is being offered is not of good quality, they [Canadians] will not choose it." At any other time, Hills's argument that market forces should dictate what books, movies, and magazines Canadians buy and see might hold more sway. But with a constitutional crisis over the status of French-speaking Quebec, a growing number of Canadians are asking themselves if they haven't already surrendered too much culturally. "One of the really painful things we have come to recognize is the lack of communication among Canadians," says Gordon Ritchie, an Ottawa-based consultant and former deputy trade negotiator for the 1988 US-Canada deal. Mexican trade officials say they fear that, given the sagging popularity both of the Canadian government and the 1988 free-trade deal with the US, the Mulroney government may find it in its best interest to walk away from the table citing concerns about cultural industries. At stake is a North American free-trade area that, if realized, would have about 360 million consumers and a combined economic output of almost $7 trillion, larger than that of the European Community. Canadian trade officials insist the deal is in Canada's best interests, but that Hills doesn't understand that culture is a sacred cow in Canada and that putting it on the agenda would spell doom for the Conservative government. Pressure on Ottawa to open up its cultural industries is nothing new. For years, US media companies have complained about laws that prevent Canadian companies from deducting as a business expense the cost of advertising in US media to reach Canadian consumers. These laws make it more expensive for a Canadian company to advertise in US media than in Canadian media. "This legislation has made the difference to the magazine industry," says Catherine Keachie, executive director of the Canadian Magazine Publishing Association. "A lot of magazines would slowly or quickly go under without it." US media companies would also like to see scrapped two articles of the free-trade agreement of 1988. That agreement leaves Canada free to offer preferential tax treatment to Canadian artists and cultural industries, to maintain its own tax rules for personal and corporate donations to cultural industries, and to keep Canadian-content regulations in place for radio and television. Arguing against these changes, Mrs. Keachie says: "It's critical to any country's sense of itself that it be able to read about itself in its own media."