After three months: a review of U.S.-Canada free trade

David Fettig | Managing Editor

Published March 1, 1989  | March 1989 issue

Nearly three months after the U.S.-Canada Free Trade Agreement has gone into effect, it may be hard to notice any changes—except in attitude.

The issue that inspired such vigorous debate north of the 49th parallel last year became reality Jan. 1., and analysts on both sides of the border agree that the main effect of the trade pact in the short run is psychological.

In the long run, there are still unanswered questions.

In brief, the major provision of the Free Trade Agreement (FTA) will eliminate tariffs between the United States and Canada within a 10-year schedule. While some tariffs end immediately, others will be phased out over 10 years.

For the most part, the agreement has received support from government leaders, consumer advocates and the business communities of the United States and Canada. But some U.S. politicians and government officials, mainly from agriculture and energy states, and the affected industries themselves, have voiced concern about the issue.

Opponents say subsidized industries in Canada have unfair advantages over their American counterparts. Supporters say that while some industries will always be negatively affected when any trade laws are liberalized, most businesses and all consumers will benefit in the long run. Besides, they say, negotiations continue on issues of subsidization, and if those problems aren't solved to both sides' satisfaction, the trade agreement could be changed or nullified.

While long-term issues that have a major impact on the Ninth Federal Reserve District—like agriculture and energy—are still to be negotiated, and the ultimate impact on those sectors is unclear, there are more short-term effects of the FTA that have been affecting area businesses since Jan. 1.

Immediate impact

The psychology of movement is more significant than the actual reduction of tariffs, said Lars Nelson, director of North Country Exporters Association, an agency located at Bemidji State University with the mission of getting small businesses involved in exporting. "The main barrier is attitude," he said.

By "the psychology of movement," Nelson was referring to the impulse of businesses to trade with Canada now that they've been made aware of the potential. Nelson regularly plays host to groups of Upper Midwest businesspeople who travel to Canada to scout opportunities for trade, and there has been great interest in the seminars sponsored by the North Country Exporters and other like-minded agencies.

Others agree with Nelson's assessment that American managers are looking to Canada since the enactment of the FTA.

"It's a marked improvement, psychologically," said Ron Harmon, manager of Big Bud, a tractor and light manufacturing company in Havre, Mont. "I think the government sometimes does something with a broad brush and doesn't realize the trickle-down effects, but this is a case where the trickle-down is positive."

"I don't see any rockets going off," R.E. Michael Hill, president of the Winnipeg Chamber of Commerce, said of the short-run. But he does see a growing awareness of trade possibilities.

Hill, who is also director of marketing services for KPMG Peat Marwick in Winnipeg, said that since 80 percent of trade between the United States and Canada is already tariff-free, the short-term effects of the FTA are definitely psychological.

"A lot of activity will be based on a stimulus, not on hard and fast changes in the market," said Stephen Maly, senior research associate at the 49th Parallel Institute for Canadian-American Relations at Montana State University.

"It's more a stimulus to entrepreneurial thinking and behavior," Maly said.

One businessman, Vincent Graziano, president of Northern Instruments Corp. in Lino Lakes, Minn., believes the FTA will stimulate people to trade with Canada, but he also thinks that such stimulation should not be needed. Businesses should be inspired to export as a matter of order, he said, and not wait for special events to lead them.

Border communities will benefit

But all that stimulus and psychological prodding will do more than just produce increased awareness in the short run, some officials believe. John Blackwood, Canadian Consul General in Minneapolis, believes that when it comes to the bottom line, border communities have the most to gain from the agreement. Indeed, total imports and exports from border states bear out Blackwood's thesis. The states that border Canada in the Ninth District trade across the border much more than South Dakota.

Echoing those statistics, Julie Johnson, president of the South Dakota Chamber of Commerce, indicated that the FTA has not generated a lot of excitement among South Dakota businesses, with most waiting to determine the pact's ultimate effect on their industries.

According to Blackwood, then, the same logic would apply to communities within those border states: the closest to Canada will likely benefit more in the short run.

Harmon, of Havre, Mont., and Oscar Olson, owner of the John Deere dealership in Bottineau, N.D., operate two border-area businesses that will likely see increased business. Although the farm implement and automobile industries have been open to free trade for years, and both companies have done a lot of business across the border, they have not been able to service their products in Canada.

The FTA will now allow Harmon and Olson to send a service crew across the border to repair implements they have sold. In the past, if the customer requested service, the implement had to be hauled back to the United States for repair.

Olson is pleased with that development, he said, because now he will at least be able to adequately service his products' warranties.

"It's going to change some of the hassles that we had to put up with," Harmon said about the ability to service products on location.

For Olson, the ability to service his customers on their farms has become more important as his market has extended further into Canada. Two of his Canadian competitors have closed in the past 18 months, and Brandon, which lies 57 miles north of the border and 91 miles north of Bottineau, is the home of his nearest competitor.

Olson regularly advertises in Canada, although he suggested that any northern business that advertises on American radio or television automatically reaches the Canadian market. The same holds true for Canadian advertisers on Canadian electronic media—radio and television programming are accessible to both countries.

More business and entertainment travel

According to Ninth District businesses who count on Canadian shoppers to support their sales, American communities near the U.S.-Canada border are already benefiting from increased retail traffic generated by a reawakening among Canadian shoppers and travelers.

While such suggestions are hard to quantify in the short run, chamber officials and business managers from across the district are optimistic that the FTA has opened up a new era in cross-border shopping and entertainment spending.

The FTA is important to the travel industry of Winnipeg, according to Chamber President Hill. North-South travel between Winnipeg and Grand Forks, Fargo, the Twin Cities and points in between will increase, he said. After all, even by car, Winnipeg is just eight hours from Minneapolis, Hill said.

"We feel, especially in Manitoba and Winnipeg—and we've never, ever had the North-South Traffic—that (the FTA) is very important," said Minaz Abji, general manager of the Westin Hotel in Winnipeg.

Richard Boustead, general manager of Fargo's Radisson Hotel, said the travel industry in Fargo also expects to benefit from the agreement. Seminars regarding the FTA have been scheduled at area hotels since the end of last year, and Boustead thinks even more travel will occur once businesses become more acquainted with the agreement.

Fargo's Radisson is advertising in Winnipeg to attract business and leisure customers, Boustead said, because Canadians were more involved in the development process of the FTA, and likewise they are more aware of the potential benefits of the agreement. Hence, he believes, they are more likely to travel.

More weekend shoppers

Increased travel would not only mean benefits to the lodging industry, but also to retail shops in border communities. While it is considered common wisdom that the value of the Canadian dollar has more to do with the amount of cross-border shopping than any trade agreement, retailers in the Ninth District still expect to benefit from the current trade climate.

Canadian shoppers frequently travel to communities like Havre and Great Falls, Mont.; Williston, Minot, Bottineau and Grand Forks, N.D.; and Sault Ste. Marie, Mich., to name just a few. There they purchase groceries, clothes and other necessities.

American consumers also travel north at times to do their shopping, and Ron Harmon of Havre believes the FTA has helped change people's attitudes toward cross-border shopping. "We shouldn't feel bad about going across the border and spending money," he said.

After all, notes John Rajala, president of Rajala Cos. in Deer River, Minn., it's just as easy for many northern Minnesotans to get to Winnipeg as to the Twin Cities.

Bob Gustafson, executive president of the Grand Forks Chamber of Commerce, has cautious optimism about the effects of the Free Trade Agreement on the Grand Forks economy. He said Grand Forks businesspeople are well aware of the impact of Canadian spending on their businesses, and they are hoping for increased consumer traffic resulting from the FTA.

In Sault Ste. Marie, the Upper Peninsula city connected by a bridge to its Canadian counterpart of the same name, Chamber of Commerce Director Frances Mansfield said retail trade has picked up since the first of the year.

While the number of vehicles crossing the international bridge that separates the two Sault Ste. Maries was increasing over the past two years, retail traffic from across the border was slowing, Mansfield said—at least until January 1989. The chamber official said retail traffic has improved since then, and, while some recognition must be given to the stronger Canadian dollar, Mansfield gives much credit for the improvement to the FTA.

Mansfield envisions big changes to develop in his region within one to three years. Given Sault Ste. Marie's place on the U.S. map, it doesn't benefit from a lot of geographical advantages, he said, and the FTA is a clear opportunity for the Upper Peninsula to take advantage of a unique circumstance.

If Mansfield's vision is correct, more joint ventures will develop across boundary lines with companies taking advantage of each country's benefits while creating products for a world market.

A supporter of the FTA, Mansfield said he and others like him had to tread quietly on the issue of free trade in discussions with their Canadian neighbors because the issue generated such strong, diverse opinions north of the border. Now, however, with the debate ended, he foresees a growing sense of cooperation between Canadian and American businesses as they try to compete within their own markets and the international economy.

Many are uncertain

Many business owners and managers interviewed for this story, however, had no response to the question of the FTA's effect on their businesses. Most people appear to be unaware of the ramifications on their industry and are waiting for information to arrive or for changes to occur.

Richard Boustead, Fargo hotel manager and chairman of the Canadian Marketing Committee in Fargo, said businesspeople are waiting for answers to questions like: When do we get started? How do we know if we have a market? Who is our competition? How do we do business across the border? What are the Canadians' expectations? Should I change my business or marketing tactics?

Answers to those questions, or at least professional guidance that will get a company on the right trail, can be found at the U.S. Commerce Department, at state offices and at organizations like the North Country Exporters Association, among others. The need for such answers attests to the popularity of trade seminars held regularly throughout the district.

Some American industries, however, are more certain of their position since enactment of the FTA—they know things probably won't change. Like the lumber retail industry. Noren Meland, owner of Meland Lumber Co. in Northwood, N.D., (about 80 miles west of Grand Forks) describes the FTA as a non-event.

"I really don't see many ramifications," Meland said. Many independent lumber companies in North Dakota are supplied by the larger wholesalers like Georgia-Pacific and Weyerhauser, he said, and the small retailer shouldn't notice any change.

John Rajala of Deer River, Minn., said Canada accounts for about 10 to 15 percent of his lumber company's business, and that won't change because of the FTA. Rajala, whose companies include a lumber mill in Ontario, said the biggest current effect on the American lumber industry is a 15 percent tax Canada imposed on its exported softwood lumber.

The tax has meant that American lumber companies have gained market share, Rajala said. The tax was a Canadian response to an earlier American tariff, and Rajala said that continuing developments regarding the 15 percent tax will have a greater impact on the retail lumber industry than the FTA.

Another American industry with little or no immediate impact appears to be banking. Bankers and bank associations contacted for this story generally are not concerned about the FTA because there are no real competitive threats or market opportunities resulting from the agreement.

Canada's national banking system includes large, powerful banking institutions that have done a thorough job of taking care of their own market, according to John Leavitt of First Bank System in Minneapolis. Also, if those Canadian banks were interested in U.S. markets, it would only be on a large scale, similar to other international banks, he said.

Leavitt, head of First Bank's international banking group, believes Canadian banks—like other foreign institutions with an eye on the U.S. banking market—would likely pursue markets on the East Coast, the Southeast and the West Coast.

U.S. banks have been able to offer a full range of banking services across the border since 1980. Under the FTA, however, U.S. bank subsidiaries in Canada will now be exempted from the current 16 percent ceiling on the size of the foreign bank sector. Also, banks from both countries will benefit from any liberalization of finance laws in either country.

For Canadian banks in the United States, the biggest business opportunity created by the FTA concerns the ability to underwrite and deal in securities of the Canadian government and their agents. The Glass-Steagall Act, which bars U.S. banks from such behavior, had also applied to Canadian banks and had only allowed such underwriting through dealers unaffiliated with a Canadian bank.

"For the future," according to the text of the FTA, "Canadian financial institutions are guaranteed ... that they will receive the same treatment as that accorded United States financial institutions with respect to amendments to the Glass-Steagall Act."

The long run

Stephen Maly of the 49th Parallel Institute said he has mixed views of the FTA, but, when pressed, said he believes it will bring net benefits in the long run. He warns, however, that any benefits are marginal, and many times speculative.

"The Free Trade Agreement could actually help our country adjust to national and international changes," Maly said. "It all fits together. The Canadian market is easiest to penetrate; it's a natural place for a novice to break into international trade."

Maly, primary author of a book-length study entitled "U.S.-Canada Free Trade: A Western Regional Perspective," said the stimulus to trade could be especially helpful to Montana, a state that is almost desperate to diversify. "The consequences of a U.S.-Canada trade agreement could be significant in Montana and surrounding regions," Maly wrote in his book. "While the negotiations did not yield a truly comprehensive agreement requiring large and immediate changes in national trade policy, the present agreement requires a gradual phasing out of existing tariffs, establishes a new mechanism for settling trade disputes, and calls for continuing discussion and negotiation regarding trade-distorting subsidies.

"In the broadest analysis the agreement may produce only minor results for the state economy, but for some businesses and industries the difference between growth and retrenchment is found at the margin."

To opponents of the FTA, Maly said their concerns are valid in the long run, but they have to recognize the limitations of the negotiators. One criticism of the FTA is that Canadian industries are so heavily subsidized that American companies will face unfair competitive pressures. The FTA calls for continued negotiations to address those issues, and, according to Maly, if an agreeable solution cannot be reached within seven years the entire trade accord could be altered or scrapped. Subsidy issues regarding energy are fair game for American critics, Maly said, but it must be remembered that America subsidizes its coal industry. Besides, if America can buy cleaner, cheaper hydroelectric power from Canada, and that makes American energy producers in the Midwest have to work harder to compete—is that a bad thing? Maly asked.

American farmers and ranchers also have legitimate gripes, Maly said, but again the issues have two sides, and the trade negotiators have their work cut out for them on those issues. Agricultural issues are complicated by the efforts of the countries working on the General Agreement on Tariffs and Trade, who hope to eliminate government subsidies of agricultural products.

Establishing a global economy

The world economy ... a global marketplace ... one large planetary shopping center—those are the economic buzzwords for the '90s. With the economies of Europe set to unify by 1992, FTA boosters see the pact between Canada and the United States as a small step in a larger global process.

"The Free Trade Agreement is the beginning of liberalization of all world trade," said Robert Armstrong, vice president of trade regulation for Public Affairs International in Toronto, in an address before a group of Minnesota businesspeople this winter.

"While free trade was a major concept of the Nov. 21, 1988, [Canadian elections] four years from now free trade will not be a concept—it will be a policy," Armstrong said.

At the same conference, held in Bloomington, Walter Stothers, agent general of the government of Ontario, reminded the listeners of one of the reasons why the United States is currently suffering from a trade deficit. The United States only exports 11 percent of its gross national product (GNP), and of that 11 percent, 90 percent is exported by just 280 companies.

Ontario, on the other hand, exports 37 percent of its GNP, Stothers said, with a wider representation of businesses.

"If I could tear down every trade barrier in the world I'd do it," said Oscar Olson. The Bottineau implement dealer blames trade restrictions and disagreements for most of the world's international ills, including war.

"Anytime you start imposing artificial barriers to commerce you're creating an ultimate imbalance, and the consumer will be shortchanged," Olson said.

It is the consumer, many analysts agree, that will benefit most handsomely over the long run from the FTA, as from most any agreements that liberalize trade.

"Let's let the Canadians do what they do best, and we'll do what we do best, and let the consumers decide," said First Bank's Leavitt, describing the philosophy behind the FTA.

A new economics

In the final analysis, John Blackwood believes that too much was made of the negative effects of the FTA—both in Canada and in the United States. The real war between Canada and the United States is not a trade war, he said, but a cultural war—alluding to Canadians' fear that their culture will be further overrun by America because of the FTA.

Blackwood cited a study by the Canada West Foundation which showed that, in general, 85 percent of Canadians will not be affected by the FTA, 8 to 10 percent will be positively affected and 5 to 7 percent will be hurt by the accord.

In the long run, however, Blackwood believes that when the 10-year phase-out period is over, and when the psychology of movement has run its course and international trade has matured even further, the economics of tariffs will be replaced by another phenomenon of trade between the United States and Canada—the economics of transportation.

The economics of doing business with Canada will be, for the most part, an economics of proximity, Blackwood believes, and not one of tariffs and foreign trade fears.