Provinces in Canada Spar Over Trade

But with broader free trade, experts warn that local protectionism will hurt jobs

CANADA'S two most densely populated and economically powerful provinces, Quebec and Ontario, are teetering on the edge of a trade war.

After more than 15 years of complaining about Quebec laws that block the flow of many Ontario goods and services into Quebec, Ontario's government has had enough.

Pressed by unemployment and falling tax revenues, Ontario Premier Bob Rae's government has begun the process of implementing what some call ``photocopy'' legislation. The laws will basically adapt for Ontario's use the same rules Quebec uses.

``It has become clear to us that Quebec feels little incentive to address our concerns,'' says Frances Lankin, Ontario Minister of Economic Development and Trade. ``We must demonstrate to Quebec why they must put an end to their discrimination.'' Quebec Industry Minister Gerald Tremblay is reported to have accused Ontario of being unwilling to negotiate. The two provinces were involved in talks through August that broke off. Calls seeking comment from Mr. Tremblay's office were not returned.

The stakes are enormous. Trade between the two provinces is nearly $50 billion (Canadian; US$38 billion) annually. A full-blown trade battle could damage the two battered economies. Yet the Ontario legislature moved forward on legislation that would:

* Discourage cities from buying Quebec-made buses. Quebec gives Novabus of St. Eustache an exclusive contract.

* Block Quebec construction workers from entering Ontario. By some estimates 4,000 Quebec workers daily cross the border into Ontario while only 300 Ontarians are so qualified.

* Encourage Ontario companies and individuals to choose local construction companies when signing contracts for the province's annual $25 billion worth of construction work.

* Exclude Quebec firms from contracting, subcontracting, or supplying materials on Ontario government-financed projects.

``The object is to negotiate an end to the trade barriers,'' says Paul Howard, an Ontario government spokesman. ``The new rules will be dropped as soon as Quebec drops theirs.''

Ontario's poor economy has put pressure on politicians to create jobs. Construction unemployment ranges as high as 50 to 75 percent, union officials say. Moves by New Brunswick, which recently adopted similar legislation, have led to talks with Quebec. Analysts say Ontario needs to gain similar leverage.

``It's about time we did something,'' says Joe Duffy of the 100,000-member Provincial Building and Construction Trades Council of Ontario. ``When the work situation is as bad as it has been lately, we complain a bit more.''

Still, some analysts say that the tit-for-tat approach is risky. ``The idea is to raise the stakes for Quebec workers and raise the pressure on the Quebec government,'' says Jayson Myers, chief economist of the Canadian Manufacturers' Association (CMA). ``It can easily backfire and lead to a trade war.''

Most Canadian provinces have barriers that restrict trade or demand local factories in return for the right to sell in the province. Domestic beer and telecommunications companies, for example, have production plants in every province of the country, he says. A CMA study two years ago estimated the cost of trade barriers to consumers and taxpayers at $6.5 billion annually. Mr. Myers says the impact of barriers on industry will accelerate as international free trade grows. Adoption of the North American Free Trade Agreement will mean Canadian companies have to compete with Mexican as well as United States companies.

Canadian firms that gain marginal protection from each other now through provincial barriers will, in the long run, still be too inefficient to compete successfully with lean unsubsidized competitors south of the border, Myers says. But the barriers also threaten investment in Canada's manufacturing future, he says.

``If you can sell across US border into Canada without a problem,'' Myers says, ``why would anyone locate a factory in Canada that was subject to provincial barriers?''

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