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Meanwhile, To The North, Nafta Is A Smash (Int'l Edition)


Business Week International International Business: CANADA

MEANWHILE, TO THE NORTH, NAFTA IS A SMASH (int'l edition)

Critics of the North American Free Trade Agreement (NAFTA) have been having a field day since the Mexican peso hit the skids. But at best, they're only half right. Even as Mexico hunkers down, trade and investment between the U.S. and Canada is exploding (charts). No wonder President Clinton is eagerly packing his woolens for a state visit to Ottawa on Feb. 23-24. The visit should offer Clinton, who once considered NAFTA his top foreign policy accomplishment, an opportunity to recoup.

But Clinton's first state visit to Canada will be far more than congratulatory speeches. Sure, trade between the U.S. and Canada hit $260 billion last year, up 50% since 1988, when the U.S. and Canada signed a free-trade agreement that laid the groundwork for NAFTA. Now, both sides are eager to tear down barriers that still stand in the way of even greater trade. At the top of the list, U.S. and Canadian negotiators are racing to complete a far-reaching "open skies" aviation agreement, which Clinton hopes to sign on Feb. 24. Beyond that, both sides are hoping to make progress in resolving trade disputes over everything from U.S. limits on Canadian sugar and wheat to Canada's decision to yank a U.S.-owned country-music TV station off the air.

Already, a surge of cross-border acquisitions and investments is linking corporations on both sides of the border as never before. The change is driven in part by the cheap Canadian dollar, which has plunged to just 71 cents, down from a high of 89 cents in 1991. In autos, for example, it now costs "20% to 25% less to assemble a car in Canada than in the U.S.," says David Adams, director of policy for Canada's Motor Vehicle Manufacturers' Assn.

Such savings has the Big Three pumping billions into Detroit North. Ford Motor Co. of Canada recently spent more than $700 million to revamp its plant in Oakville, Ont., to produce Windstar minivans, 90% of which are shipped to U.S. dealers. And now, Ford is spending an additional $1.5 billion to upgrade its Ontario truck and engine plants.

JUICY TARGETS. Thanks to similar investments, Chrysler Canada Ltd. last year produced a record 695,000 vehicles in Canada--including most of its minivans and LH models. In all, Adams figures, Canadian auto factories now assemble 17% of all the vehicles manufactured in the U.S. and Canada, even though Canada accounts for less than 10% of the North American market. While this imbalance gives Canada a huge trade surplus in autos, it also gives the Big Three a critical cost advantage.

Meanwhile, the overall surge in Canadian business investment has created some extraordinary opportunities for U.S. producers of machinery and equipment. Last year, U.S. exports of machine tools to Canada more than doubled, to a record $380 million, up from just $83 million a decade ago, according to the Association for Manufacturing Technology. Business was even better for Giddings & Lewis Inc., the largest U.S. toolmaker, whose shipments to Canada tripled, while orders jumped fivefold.

The low dollar also is making it far easier for U.S. companies to snap up juicy Canadian targets in industries ranging from software to sports equipment. "There are a lot of great software companies up there," says Thomas A. Jermoluk, chief operating officer of Silicon Graphics Inc. On Feb. 7, SGI announced it will spend $365 million to buy one of the best: Toronto-based Alias Research Inc., a powerhouse in graphics design, which developed the software used to create the special effects in Jurassic Park. Within five years, "this business could grow to $1 billion" from about $100 million now, says Alias Chief Executive Officer Rob Burgess, who will now head SGI's new Toronto-based subsidiary.

The dealmaking is even shifting control of a piece of Canada's national pastime. On Feb. 13, Nike Inc. completed its $390 million purchase of Montreal-based Canstar Sports Inc., the world's largest producer of hockey equipment. It was the biggest acquisition in Nike's history and a key step in its diversification strategy.

"MINOR IRRITANTS." The pace of cross-border deals may even increase. Last year, U.S. companies spent a near-record $3.9 billion to make 113 acquisitions in Canada, say consultants KPMG. That was matched by the record $4 billion that Canadian companies spent to do 127 U.S. deals. Simultaneously, there has been a huge surge in cross-border investments in securities. In all, the total two-way flow of private investment surged to an estimated $31 billion in 1994, up from just $2.6 billion in 1989.

A big step toward expanding trade will be the open-skies accord. It would replace a 1966 pact so restrictive that almost two-thirds of the 100 largest U.S. cities don't enjoy nonstop air service to Canadian cities. The current pact doesn't even allow nonstop flights between Ottawa and Washington. By one estimate, the number of passengers on scheduled flights between the two nations would more than double, to 19 million a year, after the three-year phase-in period.

With trade and investment surging, the highly publicized disputes between the U.S. and Canada seem like little more than "minor irritants," says U.S. Ambassador James Blanchard. Indeed, the current disputes center on less than 5% of total trade, estimates Roy MacLaren, Canada's International Trade Minister.

Moreover, the two sides have been making progress in reducing frictions. In late December, U.S. Trade Representative Mickey Kantor ended the biggest battle by agreeing to refund more than $500 million in duties the U.S. had imposed on Canadian softwood lumber. Both sides are hoping to reach compromises on outstanding disputes over agriculture and culture.

Such close cooperation with the U.S. is a startling volte-face for Prime Minister Jean Chretien's Liberal Party, which in the 1988 national elections fought to kill U.S.-Canada free trade. Indeed, some powerful Canadians, including MacLaren, are campaigning to extend NAFTA to the entire Western hemisphere. Free trade pays. A 21% surge in Canada's exports to the U.S., measured in Canadian dollars, is the key reason Canada's economy grew 4.3% last year. And Canadian exports are headed for another double-digit increase this year, thanks mostly to the U.S.

The U.S. also is benefiting mightily. Ontario alone bought more U.S. goods than Japan, our second-largest trading partner after Canada. U.S. exporters "will be big winners again this year," predicts Jonathan Doh, director of the U.S. Commerce Dept.'s NAFTA Affairs Div.

LONG OVERDUE. As the business ties between the two countries widen, overall U.S.-Canada trade could more than double over the coming decade, predicts Thomas P. d'Aquino, President of the Business Council on National Issues, which represents the CEOs of Canada's largest companies. D'Aquino is now forming a Canada-U.S. 2000 committee, which will explore ways to foster growth--perhaps even abandoning the Canadian dollar for a common currency, the greenback.

With so much at stake, during the Clinton visit MacLaren also will push for "real progress on eliminating anti-dumping" suits from NAFTA. Although MacLaren admits his proposal would face resistance from protectionists in Congress, economists argue it's long overdue. After all, with the U.S. and Canadian economies integrated as never before, it makes about as much sense to charge Canadians with dumping in the U.S. as it would to charge Ohio companies with dumping in Pennsylvania.By William C. Symonds in Ottawa, with bureau reports


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