Free Trade With US Helps Perk Up Canadian Economy

CANADA'S economy is turning around.

"I'm calling for 3.5 percent growth in 1993," says Jeff Rubin, chief economist at Wood Gundy in Toronto. "Strength will come from continuing gains on the export side, consumer spending has already started to pick up and so will [residential] construction."

Growth is being helped by the success of the Canada-United States Free Trade Agreement, which in spite of critics' predictions, has spurred exports, especially in manufacturing. A recent study by the C. D. Howe Institute, a private Toronto-based economics research group, analyzed trade numbers between the two countries since the pact went into force almost four years ago.

"Free trade with the United States has helped the development of the higher value-added industries that are crucial to Canada's future economic growth," the study says.

That is what the economists say. But some citizens may be hard pressed to reach any optimistic conclusions on Canada's economy after reading the latest numbers on unemployment, bankruptcies, and especially the federal government deficit.

The November unemployment rate rose to 11.8 percent in Canada - up in every province except Ontario and British Columbia. It is the highest unemployment level in Canada since July 1983. There were 6,047 personal and business bankruptcies in October, bringing the total so far in 1992 to more than 60,000.

And the federal government budget deficit is C$34.6 billion (US$27.09 billion), C$3.2 billion higher than expected, because of the recession. Donald Mazankowski, Canada's minister of finance, announced C$8 billion in federal spending cuts, touching the politically sensitive area of social spending.

The government wants to save C$2.5 billion a year from the Unemployment Insurance system simply by denying benefits to people who quit their jobs. That will affect 225,000 people a year who quit their jobs or are fired for just cause and then start collecting "pogey," as the unemployment checks are popularly known.

"It's an attack on workers and it's going to force people to stay in just about any job even if it's unbearable to be in that job," says Audrey McLaughlin, leader of the New Democratic Party. Reaction from other politicians and union leaders was equally harsh.

But the Conservative Party figures it is on to a political winner. The idea for cutting benefits to people who quit jobs came from the public during hearings on the economy over the last year. Nearly all Canadians know a story about someone who has taken on just enough work to be eligible for benefits then quit his job and collected unemployment pay.

"Canadians expect us to take the kind of tough fiscal action that we have taken in this budget," Mr. Mazankowski said.

Ottawa will spend C$20.7 billion on unemployment insurance this year. That is up C$7 billion from two years ago. It is the largest item in the budget after interest on debt.

The government hopes it has a winner in free trade. Opposition politicians and other critics have blamed the agreement for all of Canada's economic woes. The report by economist Daniel Schwanen of the C. D. Howe Institute argues that free trade has worked.

Canada has increased its exports to the US and the most dramatic jump has been in specialized manufacturing, just the type of industry the critics said would be damaged by free trade. In 1991, Canada exported C$9.28 billion of "office telecommunications, and precision equipment," more than 80 percent of it to the US. That is an increase of 74 percent since 1989.

The report says the free-trade numbers show Canada is reducing its role as simply a supplier of raw materials - such as lumber, pulp, newsprint, and metals from aluminum to nickel - to other countries, especially the US. It says that in areas where trade has been liberalized, "Canadians firms have been able to sustain large gains."

"Over the long term it appears that free trade will likely help Canadian industry to wean itself from dependence on the more traditional sectors of the economy," the report says. "It is unfortunate that this crucial information about the gains from free trade remains essentially untold."

Other economists are equally optimistic on Canada's economic performance next year. The Institute for Policy Analysis at the University of Toronto expects 4 percent growth next year followed by 4.5 percent in 1994.

And Jeff Rubin of Wood Gundy even puts a positive spin on the higher unemployment numbers. Unemployment is up, he explains, because some people now figure that new jobs will become available.

Thus they are encouraged to search again for work, thereby rejoining the work force and pushing up the rate of unemployment.