As Canada currency gains, firms hurting
OTTAWA -- For 15 years, free trade with the United States seemed to Palliser Furniture Ltd. chief executive Arthur DeFehr like the best thing that ever happened to his family-owned business in Winnipeg, Manitoba.
Starting in 1989, the Canada-US Free Trade Agreement cut the tariffs on DeFehr's US exports to zero, making his sofas, cabinets, and tables competitive enough to win orders from J.C. Penney Co., the second-biggest US department store chain. Spurred by the North American Free Trade Agreement in 1994, Palliser's US business got bigger yet, reaching 70 percent of its $379 million in sales in 2002.
This year, DeFehr said he has found a down side to unrestricted commerce with the world's largest economy. The Canadian dollar's 20 percent gain since Jan. 1 has reduced the revenue he generates in Winnipeg, where Palliser incurs 70 percent of its costs as Manitoba's largest private employer. And US demand has slackened.
"The need to initially focus on the US, then later the ease of selling in the US, made us complacent," said DeFehr. "I left myself too exposed."
Like a receding tide, NAFTA is uncovering a financial hazard that may slow the Canadian economy it once supported. The cross-border trade resulting from the accord left Canada dependent on the US for 85 percent of its export revenue and more than a third of its gross domestic product.
In 2001, Canada exported more to Atlanta-based Home Depot Inc., the world's biggest home-improvement retailer, than it did to Italy. That kind of concentration presents a risk for Canada, the most trade-reliant of the Group of Seven industrialized nations, and one unforeseen when Prime Minister Jean Chretien agreed to the accord in 1994.
"It's a vulnerability, of course," Finance Minister John Manley said in an interview before resigning earlier this month. "If the US economy has a problem, then we have a problem."
Canada's 10 biggest manufacturers by sales, including Bombardier Inc., the world's biggest maker of train cars and third-biggest maker of commercial jet airliners; Magna International Inc., the country's biggest auto parts supplier; and Nortel Networks Corp., North America's largest seller of phone equipment, generate an average of about half their revenue in the United States, annual reports show.
In Nortel's case, that figure jumped to 81 percent in 2002 from 54 percent in 1995. At Bombardier, it has risen to 47 percent from 42 percent.
With Toronto's SARS outbreak earlier this year turning US tourists away from Canada and Alberta's discovery of mad cow disease in May prompting a US ban on Canadian beef imports, the country's GDP contracted in the second quarter. That's a shift from the years when NAFTA was nothing but a boon to the Canadian economy. The agreement expanded the 1988 Canada-US accord by scaling back more tariffs on more products, and by including Mexico.
From 1994, the year NAFTA took effect on Jan. 1, through 2002, Canada's gross domestic product almost doubled in size, outpacing US growth more than 60 percent of the time.
"All of the growth in Canadian GDP has come from exports, mainly exports to the US," Canadian Pacific Railway Ltd. CEO Robert Ritchie said in an interview. "We have such an advantage in being located so close to the US and with a reasonably efficient border. So if we weren't taking advantage of it, people would be saying we were idiots."
A June poll conducted by Ipsos-Reid found that 70 percent of Canadians now back NAFTA, up from 64 percent in 2001 and 46 percent in 1991, before the agreement was signed.
Chretien, who retired as prime minister last week after 10 years in power, has struggled to find other markets for the country's goods. Canada has failed in almost 10 years of repeated appeals to persuade the 15-nation EU to start negotiations on a free-trade agreement, and shipments to the EU now account for only 5.2 percent of Canada's exports. That has prompted Bank of Canada Governor David Dodge to criticize the country's chief executives for rushing to the US market in the 1990s and turning their backs on a history of trading "much more globally."
"Canada cannot, and should not, lose sight of that goal by focusing only on free trade in North America," he said in a keynote speech on the future of NAFTA in July.
