U.S.-Canada Trade Gets Contentious : Commerce: The increase in friction since a market-opening agreement four years ago may bode ill for a pact with Mexico.

WASHINGTON —  Four years ago, the United States and Canada signed a free-trade agreement that both sides envisioned as a step into the marketplace of the future, pushing aside centuries-old trading rivalries and ultimately expanding to connect all the nations of the Western Hemisphere.

But as President Bush and Canadian Prime Minister Brian Mulroney prepare to meet here this week as leaders of the world’s largest trading partners, the atmosphere between the two countries is far from utopian.

Although the U.S.-Canada trade agreement has yet to be fully implemented, nasty battles are raging over commerce in products ranging from Honda automobiles to Moosehead beer. The pact has become one of Canada’s hottest political issues and is jeopardizing Mulroney’s political future.

Simon Reisman, who led the Canadian free-trade negotiating team, summed up the attitude of many Canadians a few months ago, telling the Toronto Star: “The Americans are bastards. They’re behaving like real thugs these days in protecting their interests.”

The experience is particularly sobering because it comes at a time when the United States and Canada are trying to forge a trilateral arrangement with Mexico to be called the North American Free Trade Agreement.

In what has become the biggest conflict so far, the Commerce Department on Friday accused Canada of unfairly subsidizing its softwood lumber exports to the United States, paving the way for the International Trade Commission to impose tariffs of as much as 6.51% on those products.

With almost $2.6 billion in annual lumber sales at stake, Canadian Trade Minister Michael Wilson vowed to “fight the case to the end” through the review panel established under the free-trade agreement, as well as a dispute-settlement committee of the General Agreement on Tariffs and Trade.

Last month, after years of wrangling, Canada agreed to drop restrictive practices that made it difficult for U.S. brewers to sell beer in Canada. Within days, an international panel ruled that some states on this side of the border were discriminating against Canadian beer as well.

And in March, the U.S. Customs Service issued a preliminary report contending that Canadian-built Hondas did not have 50% Canadian content, the required level to qualify for duty-free treatment under the free-trade agreement. If the ruling stands, the cars will be subject to tariffs that will make them more expensive, reducing potential U.S. sales.

While many in Congress applauded the decision, Canada has appealed, saying it has been made a scapegoat for anti-Japanese sentiment in the United States.

“The message that it sends--not just to Japanese investors, but to others who are thinking of investing in Canada--is that if you want to invest in North America, you’d better invest in the United States, not in Canada. We can’t live with that,” Canadian Ambassador Derek Burney said last week.

“There’s got to be more to this agreement than more days of us yelling at each other in court,” Burney added.

U.S. Trade Representative Carla Anderson Hills noted in an interview that free trade is a relatively new concept for this country. With Canada, the United States has learned that “we have to be very very careful in our negotiations, so we say what we mean and mean what we say,” Hills said. “Two people can look at the same language and walk away with different interpretations.”

The proposed agreement with Mexico is likely to prove even more difficult to execute, because that country has vastly different economic pressures, culture and traditions than either of its northern neighbors.

“Canada and the United States are two countries with similar economies, very similar populations in terms of language and industrial style,” said former U.S. Trade Negotiator William E. Brock III, who helped instigate the trade talks with Canada. Even under those favorable circumstances, he said, “we’ve seen that it’s not easy.”

Ultimately, Bush hopes to see trade barriers disappear throughout the hemisphere. Last week the President announced this country’s intention to enter into free-trade negotiations with Chile once the North American Free Trade Agreement is completed.

Though no one expected the free-trade experience to proceed without strain, worsening tensions between the United States and Canada are causing some experts to question whether the concept is too idealistic.

“I had expected disputes, but I had hoped that by now both sides would have cleaned up their acts a bit,” said Gordon Ritchie, Canada’s deputy trade negotiator during the free-trade talks and now an adviser to the Canadian Forest Industries Council. “After a while, the value of the whole system is going to be brought into real question. It was predicated on good faith, and that seems to be lacking.”

Yet by many measures, the U.S.-Canada Free Trade Agreement has lived up to former President Ronald Reagan’s promise of “a win-win situation for both sides.”

Last year, two-way merchandise trade between the United States and Canada reached $176 billion, up $46 billion from 1987, Hills said. Trade in services has grown to $20 billion from $15 billion. And in dozens of areas, tariffs are being rolled back even faster than had been mandated under the accord.

“When you look at our aggregate trade, the handful of disputes that we have are virtually nothing,” Hills said.

Moreover, many observers say the individual disputes--as contentious as they are--have done little long-term damage to what is basically a healthy relationship. From Canada’s perspective, “when the Americans are at their most bloody-minded, they still are better than the Europeans at their best, and the Europeans at their worst are better than the Japanese at their best,” Ritchie said.

Both sides say the recession is a major source of tension, with Canada hurt worse than the United States. Just as Americans, rightly or wrongly, have come to view the Japanese as the source of many of their woes, Canadians see this country as the villain sapping jobs from their economy.

With Canadian unemployment running at 11%, “every job that is lost is blamed on free trade,” Burney said.

Robert Z. Lawrence, a Harvard University trade expert, warned that a similar political dynamic can take hold in the United States.

For years, the income gap between skilled and unskilled workers has been growing. But once this country signs the agreement with Mexico, many are likely to start blaming the trend on manufacturing firms fleeing the United States to seek low wages, Lawrence said.

“Trade policies often get the blame, even though they are not the culprit,” he added.