WASHINGTON -- The U.S. State Department has removed Canada's favoured status as a defence and aerospace trading partner, a move that could put $5-billion a year worth of exports in jeopardy.
The policy change, which means Canadian companies will now be forced to contend with a time-consuming permit process, is motivated by concerns that Canada has failed to sufficiently safeguard American military technology and respond to U.S. security standards.
The U.S. State Department, which announced this week that Canada will no longer be exempted from U.S. export licence requirements, has also been irked by the Chretien government's continued efforts to promote an international land-mine treaty, industry and government sources say.
The new measure could seriously undermine a growing sector of the Canadian economy that is now worth $15-billion a year, industry sources said yesterday.
"This will drive a wedge right down the middle of the St. Lawrence", predicted Joel Johnson, vice-president of the U.S. Aerospace Industries Association.
Canada exports about $5-billion in defence and aerospace goods to the U.S. every year.
The industry's largest U.S. customer is the American military, which buys about $400-million worth of Canadian goods annually, mostly sensitive, high-technology equipment.
The new State Department ruling means U.S. companies seeking to import defence and aerospace goods will be required to obtain a special licence before they can even approach a Canadian company. The licensing process could take more than three months.
"With that 90-day process, the question is do you bother with Canadian suppliers", said Mr. Johnson. "While some companies may carry on with existing suppliers, the biggest problem for Canadian companies will be new business."
He noted that the move is a complete reversal of the State Department's long-standing policy of treating Canada as part of the "North American fortress" when it comes to defence issues.
The trade problems may be worsened by recent changes that have brought the U.S. government's space and satellite spending under defence procurement procedures, putting the programs under State Department control.
"Canada got it with both barrels", said Mr. Johnson.
Daniel Verreault, vice-president of policy research for the Aerospace Industries Association of Canada, which represents some 200 companies, nearly all of which are subsidiaries of U.S. and other foreign manufacturers, said the export changes pose a threat to Canadian companies.
"That's very important business to us", he said.
Boeing Co., Pratt & Whitney, Bell Textron, Litten Industries, and Allied Signal all have significant Canadian operations that could be affected by the new U.S. ruling. In addition, major Canadian defence and aerospace companies such as Bombardier Inc. could be hurt as well, said Mr. Verreault.
While the U.S. government has not provided an explanation for the abrupt policy change, industry and government sources yesterday attributed the move to State Department and Department of Defense anger over Ottawa's continuing efforts to promote a land mine ban. Sources said high-ranking members of the U.S. military and diplomatic establishment are angry with Lloyd Axworthy, the Foreign Affairs Minister, for ignoring U.S. concerns about the Ottawa Treaty that 134 countries signed last March banning the anti-personnel weapons.
The U.S., China, and Russia have refused to endorse the ban.
"We can only surmise, but all these things are related at the end of the day", said Mr. Verreault.
While the land mine issue appears to be at the forefront of American concerns, there are other irritants in defence trade between the U.S. and Canada that have come into play.
The State Department has long voiced concerns that U.S. military goods sold to Canada have ended up in countries with which the U.S. has serious military concerns. One frequently cited example is a number of U.S. armoured military carriers that were sold to Canada 20 years ago that appear to have ended up in Iran.
There have also been cases in which Canadian companies have tried to sell technology built for the U.S. military to other NATO countries.
Finally, the State Department is said to be unhappy that Canada allows its citizens to have dual citizenship with countries that the U.S. considers military security threats, such as China or Iran. In some cases, employees with suspect dual citizenship have gained employment at Canadian subsidiaries of U.S. defence companies or Canadian suppliers to the U.S. defence industry.
The two governments had been negotiating for months to try to head off the looming State Department move, but as in other recent trade negotiations, such as the ongoing tussle over split-run magazines, the two sides have failed to find common ground.
Last night, a Foreign Affairs official in Ottawa acknowledged that the U.S. has concerns about Canada's looser trade restrictions concerning sensitive military technology, but denied the widespread belief that land mine issue has been the breaking point.
"That's completely unfounded", said Andre Leblanc, a ministry spokesman. "This has never been raised at the table as an issue . . . There's no basis for making that link."
Rodney Moore, spokesman for the Canadian embassy in Washington, said the federal government had tried to head off the new State Department regulations for months. He said Ottawa is worried about the "short- and medium-term impact" the export regulations will have on Canadian aerospace and defence industries.
"Canadian officials are concerned there may be a significant impact on bilateral trade", he said.
As for the widespread belief that the State Department move was motivated by the land mine issue, Mr. Moore said there was "no apparent connection" between the new restrictions and the position of the Canadian government.
"The problem is perceived as enforcement", he said, pointing to U.S. concerns about the export of military technology to third countries.
Efforts to resolve the dispute are continuing, said Mr. Moore.