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Financial Post, Weekly edition, May 11, 1985

Seven summiteers battle over trade

Hyman Solomon (Bonn)

Despite some progress in setting the stage for a new round of talks on multilateral trade, Canada and its six Economic Summit partners shunned formal action last week to cope with slow economic growth and growing protectionism in the industrial world.

For Prime Minister Brian Mulroney, who survived his first appearance on a world stage with relative ease and a few modest successes, overall summit results promised little relief on major Canadian problems such as high unemployment.

With much of current Canadian economic activity dependent on strong exports to U.S. markets, the prospect of slower growth in the U.S. presented an uncertain menace and makes this month's federal budget more important than ever.

Canada did score summit points on environmental and Third World issues. But despite the considerable mediating efforts by Mulroney and his officials, the summit failed to reconcile the basic U.S.-French split on trade. The troublesome issue threatened from the beginning to make the 11th summit a failure.

The summit communiqué reflected the division. Six of the seven participants urged a start of a new trade round in 1986, but France refused to accept a specific date.

Mulroney intervened

Mulroney intervened several times with French President François Mitterrand, while Canadian officials searched for different communiqué options to satisfy the French.

In the end, Mitterrand baulked because of his fear the trade round would attempt to dismantle the European Community system of agricultural trade subsidies. French farmers are a powerful political force, and Mitterrand is headed into an election next year.

Mulroney said he and others tried to overcome French resistance because: "We thought it was important that France not be isolated... I still think we are on track for a new Gatt trade round."

Although Canada sided with the U.S. on most economic issues, it struck a more independent stance on political affairs.

External Affairs Minister Joe Clark, for example, made it clear that Canada opposed the U.S. trade sanctions against Nicaragua and would accept no extra-territorial extension of those sanctions against Canadian exports destined for Nicaragua.

Finance Minister Michael Wilson also revived a World Bank plan to help developing countries whose economic efforts to cope with crippling debt burdens have been undermined by falling commodity prices. Wilson said the plan would involve mixing World Bank concessional funds with regular, more costly loans to make the overall financing cheaper for selected nations such as Jamaica.

The proposal attracted some interest, Wilson said, but will take time to develop and attract sufficient support.

Initial attempts by France to tie the trade round to reform of the international monetary system were ultimately dropped when it became clear that the French were largely isolated on the issue.

The U.S. has acknowledged that its large deficits are partly responsible for its overvalued currency and high interest rates. But like Canada and others, it firmly rejects a French proposal to manage exchange rates and keep them in specified target zones through major intervention in exchange markets.

Reagan committed

President Ronald Reagan also assured his summit partners he is committed to a US$50 billion reduction in the U.S. deficit. But his ability to honor that commitment is being sorely tested by a divided U.S. Congress which cannot agree on the right mix of cuts and spending on defense and social programs.

The U.S., for its part, said only an early 1986 starting date for the trade round would fend off growing protectionist pressures in the U.S. Congress, an argument Canada and most other summit nations endorsed.

U.S. Secretary of State George Shultz said that one way or another, the U.S. will launch a drive to liberalize trade next year. If a multilateral round is stalled, Washington will turn to a series of bilaterals such as the one now being considered between Canada and the U.S.

(The near defeat of the Conservative government in the Ontario election might further dampen Premier Frank Miller's lukewarm interest in a comprehensive liberalized trade deal with the U.S. If Ontario turns total thumbs down on the proposal, Ottawa may be reluctant to opt for anything except a traditional multilateral trade negotiation.)

The idea that multilateral trade negotiations will miraculously stop U.S. and other legislators from pursuing protectionism for currently distressed industries or high unemployment regions is politically naive. Any Gatt trade round takes at least a year to prepare and launch, and then up to a decade to conclude.

The only possible immediate advantage of an early round of trade talks, whose agenda and membership is still to be worked out, is providing government leaders with a political weapon to help fend off some of the protectionists while negotiations are under way.

(Even as Mulroney was making the anti-protectionist case in Bonn, Canadian textile and apparel industries were pleading for new global quotas on garment imports from low-wage countries. In response, Industry Minister Sinclair Stevens hinted that troubled industries such as textiles might soon receive a guaranteed share of the domestic market.)

Summit efforts to deal with international debt problems did not produce any new initiatives other than Finance Minister Wilson's call to revive the World Bank's proposal for reducing overall borrowing costs for certain countries.

Although other summit countries acknowledged the U.S. slowdown and its potential dangers, neither West Germany, Britain nor Japan was willing to commit itself to supply-side stimulative measures which would help fill the slack.

Canada, with one of the highest per capita debts among summit nations, was under no pressure to do anything but reduce its deficits.

The previous Bonn summit, in 1978, did produce a concerted response to slow growth conditions, primarily by West Germany and Japan. Unfortunately, the West Germans suffered a fresh burst of inflation and the Japanese yen dropped substantially on exchange markets, making both nations gun-shy about repeating expansionary fiscal and monetary measures.

The current U.S. slowdown, it was pointed out, could help lower interest rates from which all summit and nonsummit nations would benefit.

Although the summit produced no blatant evidence of Japanese-bashing, in hopes of forcing greater entry of foreign goods into Japan, pressure on Tokyo from other summit partners is certain to continue.

A new round of multilateral trade negotiations and future changes in Japanese fiscal policy might help eventually. But in the immediate future, Japan will almost certainly pile up additional large surpluses in the U.S. and other industrial nation markets.

That is almost an iron-clad assurance that protectionist dangers will remain much too alive, well, and threatening.

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