on the World Today
THE austerity program announced by the Canadian government on November 17 brings home to the United States the seriousness of the world economic crisis. Canada suffers from the same dollar shortage that has convulsed the rest of the world. Canada is a country rich in resources, production, and expert surpluses; nevertheless, she is unable to pay for her purchases in the United States.
Traditionally Canada sold her surplus food to Europe, principally Great Britain. She received payment in dollars which the European countries earned on their foreign investments and from the export of colonial products to the United States, such as tea and sisal from India, tin and rubber from Malaya. European countries, Britain in particular, no longer enjoy such dollar income. Moreover, they do not export enough of their own products to the United States. Hence they do not have the U.S. dollars with which to pay Canada.
Unable to receive payment in dollars for her European exports, unable even to secure needed manufactured goods and coal from across the seas, Canada has been importing from the United States in prodigious amounts, at the rate of nearly 2 billion dollars a year. She exports an equal amount or more, much of it to soft-currency Europe. Thus she is in the position of a grocer who has a great many worthy customers in need, who are too poor to pay, but she is required to meet her obligations to her suppliers promptly, and in cash.
Just before leaving for the gathering of the Board of Governors of the International Bank and Monetary Fund in London last fall, Minister of Finance Douglas C. Abbott stated that unless the situation was restored by which Canada could pay for her imports from the United States by her exports to Europe, radical changes in the entire economic structure of the country would have to be made. The announcement of November 17 is the first step in this direction.
Canadian imports and exports are three times higher than before the war and in 1947 surpassed even the best years of the war period. As in the case of the United States, however, Canada’s export boom is artificially stimulated. Graham F. Towers, Governor of the Bank of Canada, estimates that one third of Canada’s 2.3-billion-dollar exports in 1946 were financed by her credit program. In proportion to her population and national income, Canada has been even more generous than the United States in extending aid to Europe, to Great Britain in particular.
In addition to wartime credits and mutual-aid grants, Canada has extended 1877 million dollars in post-war loans, of which 1250 millions went to Britain. Furthermore, 273 millions were given in post-war relief. Upon his return from London, Finance Minister Abbott stated on October 11 that he could not see any possibility that Canada would be able to extend any further credits while her trade balance with the United States continued to show a large deficit.
During the war Canada exported to England under credits and mutual-aid programs, but received the necessary dollars from the United States under the 1941 Hyde Park Agreement between President Roosevelt and Prime Minister Mackenzie King, to pool productive resources of the two countries for the prosecution of the war. The United States placed large orders for manufacturing and raw materials in Canada, thereby putting dollars into her hands for purchases in the United States.
In addition, such large-scale construction projects as Canol, the Alaskan Highway, and the Shipshaw power and aluminum plants, built with United States money, increased Canada’s dollar supply by hundreds of millions. As a result Canada reached the end of the war with substantial dollar balances. But this nest egg would not last beyond the spring of 1948 at the 1947 rate of a billion-dollar deficit in the commodity trade balance.
Austerity, Canadian style
The King government, under the able guidance of Finance Minister Douglas C. Abbott and Minister of Reconstruction C. D. Howe, took the only possible sane measures to ameliorate a financial situation that was rapidly deteriorating. The measures adopted, though far from solving the fundamental unbalance of trade, will give Canada a breathing spell.
The program announced by Prime Minister King and Finance Minister Abbott on November 17 contains many present restrictions beribboned with hopeful promises of constructive measures to come. First, absolute import prohibitions have been imposed on a long list of consumers’ goods purchased in the United States: all automobiles, refrigerators, radios, jewelry, candy, typewriters, washing machines, furniture, and a host of others.
Secondly, another large group of commodities bought from the States is put under quota restriction— the amount that can be imported is limited in quantity. Although all imports of out-of-season fruits are prohibited, oranges, grapefruit, lemons, fruit juices, potatoes, apples, and onions are under quota limitation. All textiles (except raw materials and yarns), all leather goods, timepieces, cutlery, sporting goods, and smokers’ supplies are similarly limited. The quotas are set at twice the value of pre-war imports except, for textiles, where the quota is four times the pre-war value of imports.
There will be strict, control over imports of capital goods also, which are placed under licensing by the Ministry of Reconstruction. As most industrial expansion would require some form of imported U.S. machinery, this puts the direction of investment virtually under the government’s control.
Canadian tourist expenditures are also limited to $150 per year to each person desiring to travel in U.S. dollar areas. Furthermore, extremely heavy taxes are imposed on durable consumer goods produced in Canada which use component parts manufactured in the United States. This affects, for instance, cars assembled in Canada with parts imported from across the border, It will also apply to motorcycles, oil burners, cameras, radios, phonographs, and most types of electric appliances lor the home. The purpose is to discourage the importation of parts and to encourage the establishment of completely integrated manufacturing within the country.
Oddly enough, the only step taken to increase exports to the United States is a $7 per ounce subsidy for gold production in excess of the amount produced during the year ending June 30, 1947. This industry, according to Minister of Finance Abbott, has unutilized capacity and “produces a commodity for which there is unlimited dollar market.” The subsidy amounts to a 20 per cent increase in price to the marginal producer and rectifies the 10 per cent, reduction in price that hit the Canadian producer when the Canadian dollar was revalued from 90 cents to one U.S. dollar in 1946. It also compensates for increased costs of production.
Concurrently with the announcement of these steps, admittedly temporary in nature, there was also released the news that the U.S. Lxport-Import Bank had agreed to extend a 300-million-dollar loan, available until December 31, 1948. This loan, together with savings of 200 to 300 million dollars resulting from the limitations on purchases in the United States, will enable the Canadian government to rectify its net adverse balance of payment of about 500 millions a year. This will control the situation until the end of 1948. After that more basic solutions will have to be found to redress the unbalanced economic relations between the two countries.
The long, hard pull
There are three long-term remedies which occupy Canadian thought at the present time. First, there is a wish for more self-sufficiency in the field of manufactured goods, by encouraging the processing of raw materials into finished products by home industry, thus curtailing the necessity of imports from the United States. It is hoped that some of the restrictions will achieve this result.
Secondly, the most agreeable, remedy will be to more goods to the United States. The announcement of tariff reductions under the Geneva Agreements has stirred Canada to new hope in this direction. The tariff on wheat, for instance, is reduced from 42 cents to 21 cents, and the limitation on quantity is removed. Tariffs have been reduced, in most cases by 50 per cent, and U.S. quotas have been enlarged or eliminated on such products as fresh and frozen salmon and halibut, meat and dairy products, whiskey, gin, wheat Hour, poultry, and all kinds of wood products.
There is a hope in Canada that the United States will go even further and reduce tariffs below the levels allowed by the Reciprocal Trade Agreements Act. This, of course, will run squarely into Congressional phobias.
Iron and lumber for export
The new discoveries of iron ore in Quebec and Labrador promise the largest source of this vital raw material since the discovery of the Mesabi deposit in Minnesota. Preliminary explorations of this ore body have gone far enough to invite both Canadian and United States governmental and industrial interest. The United States needs Canadian ore desperately, and the new mines open up challenging opportunities for investment of United States capital.
To ship this ore to the Middle Western steel mills, the St. Lawrence Seaway must be constructed. Canadian Minister of Transport Lionel Chevrier made it quite clear to the United States House Public Works Committee visiting Cornwall on September 16 that Canada is still waiting, after fifteen years, for the United States to carry out its bargain in developing this essential watershed. It is also hoped, of course, that Canada will get some dollar exchange in the construction of the Seaway through the employment of Canadian labor and talent.
As for lumber and plywood, a sustained housing program in the United States would continue to demand large Canadian exports. At present 35 per cent of output is set aside for Britain, and 50 per cent for Canadian consumption, leaving only 15 per cent, for exports to all other countries, including the United States. Increase in total output, and revision in these percentages, should result in improving the dollar position of Canada.
Marshall plan helps Canada
Wheat, which is Canada’s principal export surplus, is competitive with U.S. export interests, and the best market for it is in Europe. For this reason, Canadian authorities are as much interested in the success of the Marshall Plan as the Europeans, for in the Marshall Plan they see an immediate means of dollar receipts for their exports to Europe, provided Congress will allow Marshall Plan appropriations to be spent in other countries. If the Marshall Plan is successful, Canada may obtain payment for her exports by increased imports of manufactured products from Europe.
A third and final program, much more drastic and fundamental, is being talked about, in Canada among the younger officials and economists, more by way of speculation in case the long-range rehabilitation of Europe does not materialize: a planned migration and increase in the population of Canada, mainly from the British Isles, so that the agricultural surplus will have a home market, and the whole Great Lakes-St. Lawrence valley, which can easily support two or three times its present population of eight million people, will have an ample labor supply for the development of natural resources and provide a mass market for home-produced manufactures.
The various pieces of the very complex national policy which Canada is fashioning fit together into a long-range program which shows solid and consistent thought and is a credit to what is perhaps the best-managed democracy on earth.