OTTAWA -- Two years after it was implemented with promises of prosperity, the U.S.-Canada free trade agreement remains a contentious issue that is contributing to a malaise gripping Canada, currently in the midst of a debilitating economic recession.

Public opinion polls show that most Canadians view the agreement to phase out tariffs and other trade barriers by the end of the century as a betrayal of the public trust by Prime Minister Brian Mulroney and his Conservative Party government. To many Canadians, the pact has sold out the country's economic sovereignty and altered their way of life.

To its defenders, the trade pact promises to open new doors to international competitiveness and fuel economic recovery during a decade of expanding global markets. They remain convinced that Canada made the right choice in joining the free trade era when it signed the pact on Jan. 2, 1988, and put it into effect a year later.

Moreover, Canadian officials maintain, the apparent collapse last month of global trade talks in Brussels and the threat of rising protectionism has made it even more imperative for Canada to be part of a North American trading bloc with greater leverage in dealing with the 12-nation European Community and other common markets.

But as adamant as both sides are in arguing their positions, they seem to agree that it is too early to measure definitively the impact of the agreement on either Canada or the United States, the world's largest trading partners. In numerous interviews, critics and proponents of the pact produced identical documents issued by the official statistics agency, Statistics Canada, to make their case.

The situation is so cloudy that the Economic Council of Canada, an independent advisory body established by Parliament, has decided not to compile any assessment of free trade for five years, and Canada's trade minister, John Crosbie, has said that attempts so far to link the agreement to economic decline have been "simple-minded."

Despite the complexities, an emotion-charged debate over free trade rages in Canada with nearly as much intensity as it did before Mulroney's 1988 election campaign, which, in effect, was a referendum on free trade.

A recent Gallup poll showed that 52 percent of Canada's 26 million people oppose free trade -- the highest level of opposition since the firm began asking about the pact two years ago. Incipient negotiations to broaden the agreement to bring Mexico into a North American common market have only exacerbated the controversy.

Led chiefly by labor unions, the free trade critics have bombarded Canadians with negative reports timed to coincide with the second anniversary of the agreement.

The 2.2 million-member Canadian Labor Congress, in a new analysis, said the trade deal has resulted in the loss of at least 226,000 jobs in the last two years, mostly in the manufacturing sector, and that the dislocation is accelerating.

The congress's senior economist, Bruce Campbell, said in an interview that his organization has documented cases of more than 100 companies moving their operations to the United States or Mexico in search of cheaper labor. In the first year of the trade pact, 460 Canadian-controlled companies with combined assets of $24 billion were taken over by foreign owners, mainly American, he said.

"It is the restructuring of the manufacturing sector that has been most devastating. Also, the intimidation of threats of restructuring. Our members tell us there is more pressure at the bargaining table, with management saying, 'Either you accept our offer or we close down or move out,' " Campbell said.

Campbell also said that if Washington's objective in the deal was to roll back Canada's trade surplus, it succeeded. When the pact was signed, he said, Canada had a merchandise trade surplus of $17.6 billion; a year later, he said, it had fallen to $13.6 billion and by 1989 had slipped to $10.4 billion.

The trade agreement, Campbell said, has been driven from the start by an ethic of competitiveness at the heart of a policy agenda favored by U.S. and Canadian corporate interests as well as Mulroney's Conservative Party government.

"The market liberalization and deregulation under free trade is putting Canadian business under enormous competitive stress. The creation of a North American playing field has directly exposed {its} disadvantages -- smaller size, weaker financial and marketing power, higher borrowing costs, higher taxes, higher labor costs, higher transportation costs and so forth," Campbell said.

This vision of competitiveness, in the view of Campbell and other labor leaders, sees the role of the government as getting out of the way of corporate management so that it can control trade and investment in accordance with its own priorities. "In the process, the integrity of Canada as a sovereign economic and political entity is being undermined," Campbell said.

Similarly, Maude Barlow, head of an anti-free trade lobby called the Council of Canadians and the author of a scathing indictment of the pact, said, "The Mulroney government had joined the United States in abandoning the struggle for social justice and sacrificing the needs of the many to the demands of the few."

The labor congress and the council have both embraced a conspiracy theory that contends that, prior to the signing of the trade deal, the Mulroney government yielded to a demand by Washington that Ottawa allow the value of the Canadian dollar, which had been trading at 72 cents (U.S.), to rise to nearly 85 cents just three months after the agreement came into effect.

The currency swing has denied Canadian exporters their price advantage in the American market and, according to the Canadian Exporters Association, has stifled motivation to take advantage of free trade.

Suspicions of a secret deal with the Reagan administration to increase the value of the Canadian dollar -- which has been denied by Canadian officials -- were enhanced by a statement in November by former industry minister Sinclair Stevens to the Toronto Star that he believed there was such a "gentlemen's agreement." Canadian officials point out that Stevens had left government at the time and was not involved in the trade negotiations.

Supporters of the free trade pact say the labor unions and other critics are correct when they contend that the deal was motivated by the ethic of competitiveness, and they say they have no apologies for that.

Crosbie maintains that the government anticipated that some jobs would be lost and some industries would close. But he said that over the 10-year span of phased tariff reductions, more industries and jobs will be created and that Canada will undergo a "dramatic" economic renewal because of its ability to compete in expanded markets.

Thomas d'Aquino, president of the Ottawa-based Business Council on National Issues, one of the most active proponents of free trade, said: "As a result of the agreement, more and more Canadian entrepreneurs, managers and workers are thinking globally. The world's largest two-way relationship is guided more by the rule of law than congressional whim, and foreign investors see Canada as part of a larger and more dynamic whole."

In invoking the term "congressional whim," d'Aquino was referring to piecemeal trade protection measures adopted by Congress.

One senior government official involved in implementation of free trade said he is more optimistic than ever about the agreement. He conceded, though, that "it couldn't have come at a worse time" in terms of the economic recession gripping Canada and the United States, the Persian Gulf crisis and current high interest and currency exchange rates in Canada.

The official also cited as "negative factors" influencing public attitudes toward the accord Mulroney's plummeting public approval rating in the wake of the imposition of an unpopular 7 percent federal value-added tax and the collapse of negotiations for constitutional reform intended to keep predominantly French-speaking Quebec in the Canadian confederation.

"None of those things were calculated to make the free trade agreement look good or facilitate a positive economic impact. More than ever, the impression out there is that every sparrow that falls will be the result of the free trade agreement," said the official, speaking on the condition of anonymity.

"At the moment, it's all bad news, and if it isn't, it becomes bad news subjectively. That's the kind of mood the country is in," he said.