TORONTO (AP) _ The Canadian government thinks if cigarette companies are forced to wrap their products in plain packages fewer people will smoke and Canadians will be healthier.

Cigarette companies, not surprisingly, think that's nonsense. What's more, they say forcing them to give up fancy packages is an infringement of trade rules and intellectual property rights that would cost them millions.

That's the crux of the argument brewing north of the border as a parliamentary committee studies a proposal to make Canada the first country to require the plain packaging of cigarettes.

The committee will make a recommendation next month to Health Minister Diane Marleau, who then will prepare legislation for consideration by the Cabinet and eventual introduction to Parliament.

American cigarette manufacturing heavyweights have been exerting pressure on the committee to junk the plain packaging idea, pressure resented in a country keen on maintaining its independence.

Prime Minister Jean Chretien, whose Liberal Party ousted the Conservatives in last autumn's elections, also needs to reassert his commitment to reducing smoking in this nation of 27 million. His image took a severe beating earlier this year when he made deep cuts in tobacco taxes as part of an effort to curtail cigarette smuggling.

The high taxes drove people to buy cigarettes that had been legally exported to the United States, then smuggled back into Canada. Reducing those taxes seems to have been effective. Overall sales by manufacturers remain unchanged, but domestic sales are up sharply while exports have plunged, reflecting increased legal sales.

''Thirty-eight thousand Canadians die as a result of smoking every year,'' Ms. Marleau said as the health committee began its work. ''I think it's very important that we do everything to discourage them from taking up the habit in the first place and packaging is but one tool I have in that war against smoking.''

Earlier this month, the president of Philip Morris International, Inc., wrote the health committee threatening to reconsider further investment in Canada if the plain packaging law goes ahead.

''If Canada adopts legislation in total disregard of internationally recognized trademark rights, this would be a significant consideration in any new investment decisions,'' wrote William Webb, whose company owns the Philip Morris tobacco company, its Canadian subsidiary, and Kraft General Foods as well as a piece of Molson, Canada's largest brewer, and Rothmans Benson & Hedges.

The letter followed an appearance before the committee by Julius Katz, formerly the chief U.S. negotiator for the North American Free Trade Agreement.

Katz, representing the American tobacco giants R.J. Reynolds and Philip Morris, said banning the use of trademarks and graphics on packages would amount to confiscation of intellectual property.

''If such an expropriation occurred, the Canadian government would be left to face huge compensation claims,'' Katz said.

Ms. Marleau, for one, was unimpressed.

''No U.S. multinational tobacco manufacturer or its lobbyists are going to dictate health policy in this country,'' she huffed.

Both sides have gone to the committee armed with studies that seem to back them up.

Robert Parker, president of the Canadian Tobacco Manufacturers' Council, the industry lobby group, says neither advertising nor packaging influence the size of the market. The sole purpose of advertising, he says, is to influence choice of brand.

Garfield Mahood, executive director of the Non-Smokers' Rights Association, maintains that packaging does influence smoking, particularly young, entry- level smokers.

Richard Kennedy, president of the Canadian Medical Association, says it doesn't matter. He says the government should require plain packaging even if there is no conclusive evidence it would cut smoking.

''I think anything we can do, any small step we take in this campaign, is important,'' he said.

Arguments are equally unclear about infringement of complex trade rules under NAFTA or the General Agreement on Tariffs and Trade.

Anti-smoking forces say the government already places restrictions on the industry, prohibiting most advertising, requiring health warnings on products as well as disclosure of toxic contents, not to mention bilingual labeling in Canada.