When President Reagan and Prime Minister Brian Mulroney signed the United States-Canada Free Trade Agreement on Jan. 2, they did more than start a process that could phase out practically all tariff barriers between the two nations over the decade beginning in 1989.
Their deal will give an impetus to other bilateral trade negotiations and offer a challenge to the GATT-multilateral system, which, as University of Maryland trade expert Paul Wonnacott said, "served the world well for the past 30 years, but may now have run out of steam."
To be sure, as Wonnacott pointed out in an interview, the circumstances and long history of the U.S.-Canadian relationship are unique, and therefore it may be easy to exaggerate the ease with which the two countries' trade pact may be duplicated. But for Canada and the United States, as Treasury Secretary James A. Baker III claims in the current issue of the magazine International Economy, it is "a win-win enterprise."
Outside of North America, in Japan and Europe especially, the U.S.-Canadian pact may be challenged as antithetical to the principle of multilateral trade, and to the concept of the most-favored-nation (MFN) principle that has underpinned U.S. trade policy and the General Agreement on Tariffs and Trade (GATT), the international compact that regulates global commerce.
Asian auto producers could have a special problem with the pact: to qualify for zero tariffs across either border, manufacturers in either country will have to make sure that the products from any new investment have as much as 50 percent North American content. Autos made in existing facilities that presently qualify for duty-free treatment under performance tests set up by a 1965 auto pact will continue to do so. The idea, of course, is to prevent a country such as South Korea from setting up an assembly-line auto operation with low North American content and enjoying the duty-free privilege.
GATT recognizes and accepts free trade agreements and custom unions. Moreover, in the real world of the 1970s and 1980s, GATT has turned the other cheek to quotas and other nontariff barriers that effectively scuttled the interest of third nations, who were supposed to be protected by the MFN principle.
The new pact gives Canadian and U.S. manufacturers a bigger potential common market and the consequent advantages of larger production runs. And the enlarged North American free trade area should allow manufacturers to boost their export sales into an increasingly competitive world market and to meet the competition here and in Canada from Japan and Europe.
Baker openly is seeking to use the U.S-Canadian deal as a lever to get a better response from recalcitrant partners in the GATT system. The United States already has a two-year-old free trade agreement with Israel, and some trade experts wonder whether a U.S.-Japan agreement, or a U.S.-Taiwan pact, and so on, may now be feasible.
In fact, U.S. trade negotiators, long impatient with the slow-moving international trade bureaucracy represented by GATT, have warned for the past few years that if global trading rules can't be liberalized -- and expanded to the increasingly important area of services -- the United States will pursue trade agreements on bilateral lines.
William E. Brock first tossed out that idea three years ago at a Paris conference when he was the frustrated U.S. trade representative, fighting the protectionist tendencies of the European Community. At an Organization for Economic Cooperation and Development meeting, he told some of his European counterparts that if they refused to free up their rules on agriculture and trade in services, the United States would go its own way. His successor, Clayton Yeutter, has taken up the cry.
Now Baker has made the Brock-Yeutter warnings explicit. Baker wrote in International Economy that if the new Uruguay Round for liberalization within GATT doesn't pan out, "we might be willing to explore a 'market liberalization club' approach, through minilateral arrangements or a series of bilateral agreements."
The U.S-Canadian agreement, Baker said, is "a lever to achieve more open trade. Other nations are forced to recognize that the United States will devise ways to expand trade -- with or without them." That's playing hardball, and it can be assumed that other nations are paying attention.
For Canada and the United States, the outlook should be nothing but bright. The United States already is Canada's largest export customer, and Canada takes 20 percent of this country's exports. The bilateral merchandise trade (exports plus imports) totaled $125 billion (in U.S. dollars) in 1985 compared with only $88 billion between the United States and Japan, and $108 billion between the United States and all 10 members of the European Community.
The prospect now is that the free trade agreement will pull Canada and the United States ever closer together. For Japan to participate more fully in the combined U.S.-Canadian market, it will have to liberalize its trade barriers in exchange for North American concessions, as Edwin L. Hudgins of the Heritage Foundation pointed out.
U.S. Ambassador to Japan Mike Mansfield has suggested that the United States and Japan might work out a free trade agreement of their own. But a Japan-U.S. agreement is a far-away dream. Even the U.S.-Canada deal, we should remember, is not yet home free, because protectionists in the United States and Canada will continue to fight it.