Ottawa is launching a two-front assault against a rising tide of protectionism which is threatening to take hold in towns and cities on both sides of the border.

In the U.S., Canadian trade commissioners have been ordered to personally lobby senators and congressmen to loosen restrictive Buy American provisions attached to Washington's massive stimulus plan.

International Trade Minister Stockwell Day said Monday that Ottawa will continue to press U.S. lawmakers to dial down the desire to buy local, which would shut out Canadian companies who are eager to take part in the historic U.S. recovery plan.

"Part of the ongoing strategy is to bring to the attention the negative effects of Buy America, and that's why you will see tomorrow on the Hill in Washington (our) trade commissioners from all over the United States fanning out," Day said Monday.

Meanwhile, Finance Minister Jim Flaherty is warning Canadian municipalities to back away from retaliating against the U.S. with similar protectionist policies.

"We know what that means, that means trade wars and no one benefits from that in the long run, that's what led to the depression in the 1930s," Flaherty told CTV's Power Play on Monday.

Flaherty was responding to a weekend vote by municipal leaders barring contracts from U.S. firms that have stopped buying Canadian products under the U.S. Congress' policy.

By a vote of 189-175, politicians attending the Federation of Canadian Municipalities annual meeting in Whistler, B.C., voted Saturday to shut out U.S. bidders from city contracts.

Flaherty added that Ottawa is working hard to make ensure that governments at the state and municipal level in the U.S. stick to the Obama administration's official opposition to protectionism and to back away from new trade barriers.

Canada to lead the way in global recovery, says Flaherty

Flaherty also said there is reason to be cautiously optimistic that Canada's economy has stabilized after months of low confidence, shaky markets and tight credit.

Flaherty, in Montreal for the 15th annual International Economic Forum of the Americas, said Canada will lead the way when the global recovery occurs.

The finance minister said Canada is in the best shape of any G7 country even though the deficit is expected to pass $50 billion this fiscal year.

"I think we're stabilizing, that's the most important thing. And we're seeing some positive signs," he said, pointing to rising consumer confidence and an increase in housing starts last month.

Flaherty said Canada's economy could be on the road to recovery by the fall.

"There are some good signs that Canadians have a comfort level in our economy, they know we have an action plan, they know we're implementing it and they know, relatively speaking, we're well off in the world."

However, Flaherty said that job losses could continue in the short-term and that Canadians will continue to feel the pinch for the rest of the year.

Despite signs of recovery, Flaherty said that the job market is often slow to respond, but he noted that Ottawa's stimulus spending will help ease those losses.

"We need to have stimulus in the economy to employ Canadians."

Earlier Monday, the Organisation for Economic Co-operation and Development (OECD) released a report indicating an "easing pace of deterioration in some major economies."

The report says the signals are the strongest in Canada, France, Italy and Britain.

OECD Secretary General Angel Gurria, also in Montreal for the conference, said Monday that world leaders must prepare for the permanent scars the current recession will leave behind.

"It (the economy) was in freefall up to this moment and now that has stopped," Gurria said.

He added that positive economic growth may come towards the end of 2009 or early 2010.

Gurria also said at present there is no choice but for governments to spend their way out of the recession.

"There has to be more debt on the books for awhile," Gurria said.

"As long as you know how you're going to go for a safe landing later."

With files from The Canadian Press