Canada drops qualms, moves toward free-trade talks with US. Mulroney wants package of trade-barrier reductions

Canada has made a momentous decision -- to negotiate a free-trade zone with the United States. When making the announcement in the House of Commons last Thursday, however, Prime Minister Brian Mulroney did not use the words ``free trade'' for political and historic reasons. In 1911, Prime Minister Wilfrid Laurier lost an election when he sought free trade with the US. Some Canadians worry about losing their national identity through too-close ties with their powerful southern neighbor.

Rather, the prime minister spoke of negotiating ``the broadest possible package of mutually beneficial reductions in tariff and nontariff barriers between our two countries.''

The decision to proceed with the talks may be more significant to the US than many Americans realize. Canadians often complain that they feel taken-for-granted by Americans.

Already Canada and the US have the largest bilateral trade and economic relationship in the world. In 1984, two-way trade exceeded $113 billion. Canada accounts for more than 21 percent of all US exports. The US takes some three-quarters of Canadian exports.

Moreover, US exports to Canada grew by more than 20 percent in 1984, compared to an average growth for US exports to other markets of 8.7 percent and to Japan of 7.6 percent. Indeed, the Canadian province of Ontario alone received more US exports last year than did Japan. It's estimated that the jobs of 2 million Americans depend on exports to Canada -- and 2 million vice versa also.

Over the decades, the two economies have become ever more closely integrated. A post World War II succession of worldwide trade deals under the General Agreement on Tariffs and Trade (GATT) has greatly reduced trade barriers between the continental neighbors. And already a successful free-trade arrangement exists for automobiles and parts.

Moreover, Canada's dollar floats (with some Bank of Canada guidance) against the US dollar. This makes tariffs less important to bilateral trade.

The Canadian decision to go ahead with negotiating a trade deal with the US follows an intense national debate in Canada. The trade issue has been examined by a number of academic and government studies, parliamentary inquiries, and a three-year study of the Canadian economy by a special Royal Commission.

``Economics, geography, common sense, and the national interest dictate that we try to secure and expand our trade with our closest and largest trading partner,'' Mr. Mulroney told Parliament.

The prospect of reduced or eliminated trade barriers causes the most concern among manufacturers in the province of Ontario. However, one government study indicates that free trade could boost Canadian real incomes by 5 to 10 percent because it would promote more efficiency in some industries. Overall productivity could increase 30 percent, the study held. This improvement, however, could involve sizable shifts in jobs from some industries to other industries.

Other factors that undoubtedly prompted the Mulroney government to take the political risk of seeking freer trade with the US include:

1. A high unemployment level -- 11 percent. James Kelleher, minister for international trade, told Commons that free trade could ``save jobs in the short term and create jobs in the medium and long term'' by stimulating growth throughout the nation.

2. Canada's western provinces have become stronger economically and politically in the postwar years. These provinces have always been pulled south economically by the might of the US.

3. Canada is concerned about US protectionist moves. Mr. Kelleher spoke of ``the ease [with] which imports from Canada are swept up in [protectionist] measures aimed at others.'' In addition, Canada itself has been the trade target of some US firms, such as those in the lumber industry hit by Canadian exports.

Perhaps most relevant to the government's decisions were surveys showing that Canadians are more self-confident in their nationalism. Many no longer feel that closer economic ties automatically are a danger to political independence. At the time of Laurier's defeat, Canada shipped two-thirds of its exports to Great Britain, and the US was a secondary market. Now, the trading roles are reversed, but Canadians have fewer fears about being dominated by the US and are more confident in their own

national identity.

Nonetheless, the Mulroney government was cautious enough to rule out a tighter common market or custom's union in favor of looser trade liberalization. To comply with the rules of GATT, that would imply a ``free trade area'' covering the bulk of Canadian-American trade.

Negotiations are expected to begin next year. But, considering their difficulty, they could take years to conclude. CHART: Canada's burgeoning trade with US (In billions of Candian dollars)

Exports Imports 1980 48.2 48.5 1981 55.5 54.5 1982 57.7 47.9 1983 66.3 54.1 1984 85.1 68.5 Source: Canadian government