A trade war between Michigan and Canada appears to have been averted, thanks to an agreement reached by the two sides on a controversial tax that would have cost Canadian companies millions of dollars annually.

The Michigan House of Representatives recently approved Gov. John Engler's plan to phase out the Single Business Tax (SBT) over 23 years, a move that all businesses embrace. But included in that language was a provision to tax all foreign companies for business activity in the state, even if the companies have no permanent base in Michigan and even if they are not subject to U.S. corporate income tax.

Also under the House version, the tax would be applied to foreign companies partially based on their total employment worldwide. But after intensive negotiations in Lansing, the Senate, and later the House, passed a version that would tax only what is "value added" in Michigan, alleviating much of the Canadian concern.

Also, it would excuse some Canadian firms without permanent Michigan operations from paying the SBT. Canadian firms appear satisfied to be getting some legislative relief. Without it, Canada was considering retaliatory measures.