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Report Questions Importance of U.S.-Canada Free Trade Agreement

March 19, 1991

BUFFALO, N.Y. (AP) _ The U.S.-Canada free trade agreement has played only a minor role in the surge of Canadian shopping and investment in the United States, according to a new report.

Other economic factors, such as a strong Canadian dollar and lower U.S. taxes and interest rates, are more responsible for increased Canadian economic activity in the United States, according to the report by the Royal Bank of Canada.

The trade agreement’s main effect may have been simply to get Canadians to take a closer look at the United States, the report said.

″Since the signing of the agreement, people have become aware of how much cheaper things are in the States,″ said Serge Jeanneau, an international economist with Royal Bank. ″It’s not related to free trade, it’s related to increased awareness - which may have been induced by free trade.″

The agreement, signed in 1988 and being phased in over 10 years, eliminates a variety of tariffs and other barriers to trade between the United States and Canada.

Since the agreement took effect, a number of Canadian firms have opened plants along along the border. But the bank said companies considering moving to the United States cited the free trade agreement as the least important of eight factors they considered before deciding to move.

The more important factors included high labor costs, taxes, interest rates and the Canadian dollar.

For example, Jeanneau said, Canada’s top marginal income tax rate is greater than 50 percent in some provinces, while the comparable rate in New York state is less than 40 percent. In Ontario, federal and provincial sales taxes add 15 percent to the cost of most purchases, nearly double New York’s highest rate.

″Even relative to New York City, for instance, the taxes in Canada are substantially higher - income and property and school and indirect taxes,″ Jeanneau said. ″Quebec, for instance, is the most highly taxed state in North America.″

The free trade agreement also is not the reason Canadian shoppers have flooded into border malls for nearly two years, the report said. It said the strong Canadian dollar, which has risen 21 percent against the U.S. dollar since 1986, is the main cause.

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