Canada

DURING the last months of the Eisenhower Administration, signs of a critical deterioration in Canadian-American relations were everywhere apparent in Canada. Canadians were simply in a mood to be unimpressed by anything attached to an American label, from the Bomarc missile misfires to the U-2 incident, the uproar over Cuba, and the curtailment of U.S. spending abroad. Yet this cultivated contrariness had almost nothing to do with the political complexion of the American Administration. The greatest boom the country had ever seen was grinding slowly into a recession of major importance and the Canadians were taking out their frustrations on the suppliers of the capital — American industry.

Canada’s irritation was expressed in a number of ways. The Canadian government, for example, established a Royal Commission to investigate the ailing automobile industry. In its hearings, the harm done in Canada by company policies emanating from Detroit was catalogued and criticized. One of the most outspoken critics to appear before the commission was Leslie Frost, Premier of Canada’s richest province, Ontario, in which the auto industry is located.

A Royal Commission was also established to investigate the harm done to Canada by the growing practice of publishing Canadian editions of American magazines. The main targets, here, were Time Inc. and Reader’s Digest, publishers of Canadian editions which differ from the U.S. publications only in that they contain small Canadian editorial sections. These spill-over editions together now skim off so much of the advertising cream available to Canadian magazines that the periodical press in Canada is threatened with extinction. During the hearings, the chairman of the commission, Mr. Gratton O’Leary, attracted wide public attention with his blistering comments on the commercial practices of the American publishers in question.

The Board of Broadcast Governors, which was set up by the present government to control radio and television in Canada, ordered all stations to establish a minimum of 55 per cent Canadian content in their broadcast schedules. The order goes into effect at the end of this year. Canadian broadcasters, including the government-owned Canadian Broadcasting Corporation, have been flooding the airwaves with the worst of American television from the private-eye and Western productions of Hollywood.

James E. Coyne, governor of the Bank of Canada, is making a series of trenchant public speeches demanding an end to Canadian reliance on the United States for its capital requirements and drastic curtailment of imports of goods and services which can be supplied internally. In Coyne’s view, only the most energetic action will save the country from the disaster that is built into its skyrocketing foreign debt.

The Conservative government of Prime Minister John Diefenbaker just before Christmas brought down a “baby budget" in which it made several tax changes aimed directly at American absentee investors and owners of Canadian branch plants. Most important were the imposition of a 15 per cent withholding tax on foreign payments for interest and dividends of future investments and the imposition of this tax on the profits of the branch plants if they try to avoid the impost by not declaring dividends.

Each of the above generated its own prolonged public uproar. Coyne’s speeches so scandalized a group of academic economists that nineteen ol them petitioned the Minister of Finance, Donald Fleming, to fire Coyne. Whether Fleming has the power to do so is doubtful. But the minister ducked the issue anyway, by refusing either to defend Coyne or silence him. The tax changes in the budget, in any event, indicated that Coyne’s advice is being taken, if only in small doses.

Canadian boom

That “American” is a dirty word in Canada cannot be denied. But it is used completely without animus or rancor, in the sense that “Colorado” is used with potato beetles, “Spanish” is used with influenza, and “German” is used with measles. In Canada, “American” only means where the problem comes from, and it means no more than that. The problem itself is the end product of a series of economic developments of the last ten years. Like an installment-plan addict without sales resistance. Canada has lived on Cloud Nine for the better part of that period. It borrowed frantically to finance its development. Then it borrowed to pay interest on its foreign debt. It sold off its resources, and it mortgaged its future. But it accomplished an economic expansion and industrial development in ten years that otherwise might have taken thirty or forty years.

Throughout its history, the Canadian economy has been based upon exporting large quantities of natural products and importing manufactured goods. Wheat and other farm I products, lumber, pulp, and paper, copper, zinc, and nickel exports were the foundation of Canadian trade. King Wheat laid an even heavier hand on Canada than King Cotton once did on the United States.

In this century, Canada has been driven by an irresistible urge to break out of this pattern. Slow but steady progress was made before World War II. Since the war, billions have been poured into the expansion of the manufacturing industry of Canada, mainly by American corporations establishing and expanding branch plants. Thirty years ago, 30 per cent of the Canadian labor force was in agriculture. Today the number is less than 10 per cent, while whiteand blue-collar workers make up 70 per cent of the labor force — an increase of 50 per cent, relatively. The labor force itself has increased from four to more than six million. Population grew from 10,350,000 to 18,000,000 in the same thirty years.

During the early years of the boom, Canada’s gross national product grew at the rate of 4.5 per cent per year, and economists in and out of government assumed a stable rate of growth had been established. However, it slowed to half that rate in 1957 and seems to have stabilized at around 2.5 per cent. As the bumper crop of war babies hit the labor market, the labor force touched an all-time high. But with the slowing of growth, unemployment rolls have also risen steadily, until in January of 1961 690,000 Canadians, 10.8 per cent of the labor force, were unemployed.

The country, hence, has been both riding the crest of a boom and wallowing in the worst depression of employment since the middle 1930s. The signs of the boom are everywhere and impressive. Construction valued at $7.2 billion is ahead for 1961, of which almost $2 billion will be spent in Quebec. Pulp and paper exports are booming and should expand with the decline in the Canadian dollar. Several hundred million is to be spent on natural-gas pipelines and processing plants in Alberta. Wages and salaries are near record levels.

The signs of recession

Unhappily, there are critical pockets of unemployment all over Ontario, Quebec, the Maritimes, and in the West, The federal government has increased and stretched out unemployment benefits to a point where the unemployment insurance fund faces bankruptcy. Agriculture is still depressed by a 750-millionbushel wheat glut, and despite frantic efforts to expand wheat sales, the glut remains. The automobile, steel, electrical goods, and textile industries and all the ancillary suppliers are in the doldrums. The most serious unemployment is in the secondary manufacturing industry that has undergone the greatest expansion, and it is very heavy in the branch plants of American industry.

In this atmosphere, it was easy for people being laid off in Canadian secondary industry to find someone to blame. It was the absentee American owners of the Canadian branch plants who made policies to serve their own corporate interests, not those of Canada or their Canadian employees. This belief led to the widespread and prolonged agitation to force the foreign companies to put Canadians in their top Canadian jobs, to permit their Canadian plants to operate their own research departments, and to name Canadians to their boards of directors.

In a speech in Calgary, Mr. Coyne summed up the situation in these words: “Our judgment has been clouded and our initiative stunted by the fact that so much of the more advanced sections of Canadian industry is controlled and dominated by foreign enterprise. ... No country in the world with anything like our relative state of development has ever had such a degree of foreign domination.

“By 1956 our whole manufacturing industry was 48 per cent foreign owned and 52 per cent foreign controlled, and in many important types of manufacturing the foreign dominance runs from 75 to 100 per cent. . . . Important management decisions are for the greater part taken outside Canada by foreigners, whether they be American or European, and taken for reasons that have nothing to do with the outlook or aspirations of Canadians. In most such companies, Canadians are not encouraged to have new ideas, cannot put their ideas to the test, and cannot assume the responsibility for proving and carrying out their ideas.”

A few weeks later, speaking in Toronto, Mr. Coyne pursued the question down some different avenues. He pointed out that Canada’s external debt had risen from $4 billion to $17 billion in the last decade and that 60 per cent of all dividends paid by Canadian corporations went to nonresidents. Residents of the United States own 76 per cent of all the foreign investment in Canada and control more than 80 per cent of all foreign-controlled companies in Canada.

“It is tempting,” said Mr. Coyne, “to speculate how Americans would regard a similar situation in relation to their own country, that is to say, what their feelings would be if the United States had a foreign debt of the order of $250 billion, with the bulk of their most valuable natural resources owned or controlled by foreigners and more than half of their manufacturing industry likewise owned or controlled outside their own country.”

American control

However, Mr. Coyne’s unpleasant truths are far from sweeping the country. Coyne emphasizes that Canada’s foreign debt is complicated by a whopping deficit in its merchandise trade of $500 million a year. With almost one voice, Canadians react: “So what? The solution is simple — increase our exports to balance our imports, and the problem is solved.”

But controlled, as it is, in the United States, the bulk of Canadian industry cannot export cither to the United States or to many other countries because of policy decisions made in the United States. General Motors can hardly permit its Canadian plant to ship Chevrolets to Chicago to crack that market by underselling its Detroit plant. In the automobile industry, Canadian branch plants once exported to the Commonwealth. That trade was shut off by the parent companies when they built new branch plants in the Commonwealth countries.

Because Canadian plants are restricted largely to the domestic market, unit production costs are high.

This has made it possible for a flood of Japanese goods and Western European cars to come in over the tariff and capture important segments of the Canadian market. The textile industry of Quebec, for example, estimates that imports have cost 30,000 jobs in the textile industry alone. Industry which cannot compete in its own protected home market will surely have difficulty against the same competition abroad. Yet this fact has got little attention in Canada.

Shutting off American dollars

What, then, is the answer? Will the Canadian economy continue to drift, and will pressure build up until something has to give explosively? Probably not. Perhaps the most encouraging factor in the situation is the stated determination of Washington to curtail American investment abroad. It has been the tax concessions in the Internal Revenue Code of the United States which caused the flood of U.S. investment into Canada and elsewhere.

Such things as percentage depletion, the foreign corporation tax exemption, and the Western Hemisphere tax exemption have siphoned billions of dollars in U.S. capital into Canada, South America, and Europe. The removal of any one of these tax advantages, particularly the percentage depletion allowance for oil companies, would dry up much of the capital flow.

Beyond nationalism

In Canada itself there is every indication that there will be no precipitate action either by the present Diefenbaker government or by the Liberals, if they are returned to power. During the past year, when the government was presented with a nationalistic solution to its oil surplus problem, it ducked for cover.

The facts are these: While Canadian oilfields are capable of producing 1.1 million barrels of oil a day, they have produced about half that amount. The international oil companies, which control 80 per cent of Canadian oil production, have used their Montreal refineries to market oil they produce in Venezuela and the Middle East. It enters Canada duty free. A vestigial group of independent Canadian companies agitated for the construction of a $400 million crude-oil pipeline from Alberta to Montreal, which would add 250,000 barrels a day to Canadian production and cut Canada’s merchandise trade deficit by $250 million a year.

But in its recently announced national oil policy, the Diefenbaker government rejected a new pipeline in favor of a voluntary expansion of United States markets, as proposed by the international companies. In making the decision, Mr. Diefenbaker took another giant stride away from nationalism. He sent his Minister of Finance and Minister of Trade and Commerce to Washington to alert the Kennedy Administration about what was being done before the policy was disclosed to Parliament in Ottawa. Unheard of as such a procedure was, it provoked no reaction in the Liberal Party. Neither did the national oil policy.

Liberal Party strategy

“New Frontiersmen" to beat the economic underbrush are as scarce in the Liberal Party as they are in the government. Last summer, former Prime Minister Lester B. Pearson. in search of some new ideas, arranged to have two hundred “liberally minded" Canadians from outside, as well as inside, the party meet for a week’s seminar at Kingston. The “new" idea that attracted the most attention and enthusiasm was presented by a displaced Canadian professor from the University of Chicago. He proposed a freetrade union with the United States — a notion last seriously heard in Canada in the election of 1911.

On the other hand, an attempt by Walter Gordon to interest the audience in the problems resulting from American control of Canadian industry never got off the ground. A few months later, the whole performance was repeated at a Liberal Party convention in Ottawa. Dedicated, as it is, to what Coyne has described as “outmoded theories of trade,”the Liberal Party obviously has turned its back on the nationalist vote.

Actually, the Liberal strategy is to try to coast back into office on the public disenchantment with Diefenbaker. Despite his efforts, things get slowly worse instead of better, The Liberals are now back in power in Quebec and New Brunswick, and there is no doubt that Diefenbaker’s prestige is at a low ebb elsewhere in the country.

But Mr. Diefenbaker and his Conservatives are in power at least until 1962, and probably 1963. Aside from making nationalistic noises, it is most unlikely that he will do anything to impair relationships between Canada and the United States, politically or economically. Canadian defense policy will still be rigidly welded to American defense, and always will be. A true indication of the attitude of Canada toward the United States was the haste with which Mr. Diefenbaker appeared on President Kennedy’s doorstep after the inauguration.

But the first big stride that can be made toward tackling the problem must be made in Washington. That will be when the Kennedy Administration takes concrete steps to shut off the tax concessions that are raining American dollars down on the world from a thousand nozzles.