A Canadian Looks Us Over
We have in Canada an ally, staunch, hard-working, and of almost limitless resources. But we must stop looking on our northern neighbor as a younger brother or as a forty-ninth state, an overbearing attitude which comes out all too frequently in our business dealings with Canadians. JAMES H. GRAY was trained as an editorial writer by John W. Dafoe, Canada’s greatest editor. In 1947 Mr. Gray became the editor of the Farm and Ranch Review, and he is today editor and publisher of the Western Oil Examiner of Calgary.
by JAMES H. GRAY
LIVING next door to a boy learning to play a fiddle can frazzle the nerves of even the most friendly neighbors. Living next door to a nation which is trying to learn how to be a great power can have the same effect on another nation. The transformation of the United States from an isolationist nation into the leader of the free world has been a fascinating thing to watch from Canada. But the leftovers from the isolationist days, the unchanged thought patterns of American polities and business, periodically give Canadians conniption fits.
The latest example erupted just before Christmas, over tolls for the use of the St. Lawrence Seaway. As all the Seaway advocates have been saying for thirty years, the purpose of the St. Lawrence canal is to give the whole Great Lakes industrial area and the consumers of the mid-continent the benefit of lower costs that come with ocean transportation. From this premise several conclusions follow. The first is that the cost of the project must be kept down so that tolls may be set at the lowest possible point; high tolls mean high shipping rates. The second is that there must be the maximum freedom of movement of all ships into and out of the area. The third is that the whole purpose of the waterway will be defeated if shipping is restricted.
The Canadian view has always been that the ships of the world will ply the waterway with freedom of call. This will encourage ships to come in for long-haul exports and will speed the movement of short-haul domestic freight. But when Canadians sat down to discuss canal tolls, they discovered that the United States has no great burning ambition to permit that to happen.
American taxpayers subsidize their shipping to the extent of about $100 million a year. Whenever it is decided that a sea route is “essential to the trade and economy of the nation,” ships using the route are entitled to a subsidy which will amount to about $750 per day. This is in addition to the usual grant of 40 per cent of the building costs and 50 per cent cargo preference. When the United States, early in 1956, promulgated the Great Lakes — Northern Europe and Western Europe route as “essential to the trade and economy of the nation,” Canada regarded it as an unfair act, one that violated the spirit of the St. Lawrence agreement.
American coastal laws will not permit goods to be moved between U.S. ports in foreign bottoms. Through the canal American ships will monopolize American trade. And because they are subsidized, U.S. ships will grab off much of the Canadian trade. Canada’s exchange problem would thus be substantially worsened. Its trade deficit with the United States is currently out of balance by $1 billion a year. It makes up for this in part by selling more than it buys from the United Kingdom and Western Europe. It is in Canada’s interest to let non-U.S., foreign ships pick up Canadian cargo and earn Canadian dollars with which to buy Canadian goods.
The joker in all this for U.S. taxpayers is that 95 per cent of American ships will be unable to use the Seaway if they are fully laden. In the last generation the trend in marine architecture has been to large vessels which draw a maximum draft of 30 feet or more. Most ships of the American merchant fleet fall into the modern category. European shipping, however, has not followed this trend so closely. The European tramps are generally smaller and may draw only 22 to 20 feet fully laden. To compete with them, the American ships must sail partly loaded. That will boost their costs, make their operations along the route uneconomic. This, Canada fears, is bound to cause the U.S. to seek higher tolls to discourage foreign shipping.
In applying the subsidy regulation to the St. Lawrence Seaway the United States sowed seeds of doubt as to its good faith in future operation of the Seaway. There is reason to believe that this doubt led to the Canadian decision to reject American protests and proceed with the construction of the Cornwall link at a cost of $17 million.
That link will become part of an all-Canadian system of locks. The United States regarded such construction as unnecessarily adding to the cost of the Seaway. The Canadians have always held that two sets of locks are essential, one on the American side and one on the Canadian side. With the United States insisting on retaining one end of the canal in its control, despite Canadian protests, Canada decided it could not afford to remain vulnerable to ill-conceived or politically inspired action in Washington which might harm Canadian interest. It notified Washington it would build the Canadian link immediately.
Canada expects that ships will use the waterway right up to Fort William. This will save large sums now expended in rail freight from Montreal to central Canada. Moreover, it expects some foreign ships to participate in the local coastal trade— to pick up material at Toronto and deliver it to Fort William, or at Buffalo for shipment to Fort William. In the other direction, these ships will be able to load grain at Fort William for shipment to Europe. But if they are discouraged from entering the waterway by high tolls or competition from subsidized American bottoms, they will not be able to move out Canadian grain, which was one of Canada’s main reasons for building the canal.
2
THE shipping subsidy is an almost perfect example of how domestically motivated legislation can fog up international relations. Other sections of Canada have lately been affected by other examples. American agricultural price support programs have created surpluses which have been dumped on world markets to unsettle international trade. Quotas have been imposed against Canadian imports. Efforts to export Canadian gas to the United States have been endlessly delayed by clashing local interests.
Of particular importance in rousing widespread Canadian reaction against Washington has been the recent attempt, by the U.S. Bureau of Internal Revenue, to force an American-owned Ontario company to pay back taxes to the United States on income that the Canadian government ruled was tax-exempt sixteen years ago. If the U.S. courts sustain the U.S. government, the reciprocal tax agreements between the two countries, which are the foundation of Canadian-United States industrial relations, will be abrogated. The confusion such abrogation could create would involve thousands of companies and billions of dollars. So important did Canada consider this matter that Prime Minister St. Laurent himself protested to Washington. Yet at last reports the case was bound for American court decision.
In themselves irritations of this kind may be inconsequential when compared with the bonds of friendship that exist. The collective result of this continual wrangling, however, is to tarnish the vital prestige of American leadership in world affairs. That was seen in Canada when the English and French invaded Egypt.
Canadians generally reacted to American denunciation of the invasion with: “What would the Americans have done if some tin-pot dictator in Panama had announced he was nationalizing the Panama Canal? Waited for the United Nations to devise a formula to appease him sufficiently so that he would permit some nations to use the canal? In a pig’s eye they would!”
So long as the United States was an isolated nation living largely to itself, the laws it made were its own business. But a world power must reconcile the laws it passes with the role it has to play in the world. That role, moreover, must be recognized by American business, which also is expanding rapidly abroad.
Because they have become accustomed to trading in interstate commerce, American businessmen tend to regard the rest of the world as just another state. What works in Texas must work in Canada. The reason it is not working must be that Canadians don’t know about it. So it becomes the first chore of all newly appointed managers of American branches in Canada to enlighten Canadians. After they have discovered the endless differences between Canada and the United States, they spend the next couple of years trying to explain Canadian idiosyncrasies to their bosses back home.
The manager of a Canadian subsidiary which had been in business in western Canada for forty years got a letter last fall from his sales manager. The latter had seen a three-line item in a Chicago paper reporting that Canada was harvesting a bumper wheat crop. This was enough to impel the sales manager to urge his Canadian outlet to increase its orders and launch a special drive to get the company’s share of the flush farm income.
“What’s the use?” the branch manager asked. “Here we’ve got our elevators jammed with wheat from last year. All over western Canada grain is piled in the fields because there is no place else to store it. I’ve told them that. I’ve explained how Canadian farm spending is now spread over a full year because farmers can’t market their grain in the fall of the year they grow it. I’ve explained our quota system. What’s the use!”
Of greater importance than the ignorance of some sales managers is the application of company rules to Canadian operations. In most U.S. multi-plant operations, one branch is usually designated as the export branch. All inquiries from abroad are channeled through this branch. Canada has a small army of trade commissioners scattered around the world drumming up Canadian trade. They bombard Ottawa with reports of markets for exports and supplies of goods available for importation. Ottawa gives these bulletins to Canadian business.
Last fall, follow-up surveys disclosed that many of the needs were being filled by American instead of Canadian factories. The Canadian branches had sent the information home to the U.S. and ultimately the designated export branch had got onto the sale. Why? Because Canadian branches were not permitted to sell Canadian-made goods for export. When this became bruited about Ottawa, roofs were dented all over the Trade and Commerce Department. As the Rt. Hon. C. D. Howe, Minister of Trade and Commerce, said later, “Too often, I regret to say, our trade representatives abroad turn up export opportunities for a subsidiary company operating in Canada only to find that the United States parent does not permit the export business to be done from the Canadian plant. Mind you, we do not object to doing occasional export promotion for United States corporations, but you will agree that it is rather difficult to justify the expense to the Canadian taxpayer!”
Mr. Howe, who is one of the greatest Canadians of this century, recently went to Chicago and Milwaukee to make two speeches to American businessmen—obviously in the hope of dampening down some of the anti-American feeling that has been aroused in Canada. His speeches were appeals to Americans to try to understand Canada and Canadians. That he should have felt the need to make such speeches is an indication of the work that is required on Canadian-American relations. Mr. Howe, himself American-born, gave up a lucrative engineering business to enter politics in 1935. He built the Trans-Canada Airlines, was in charge of the entire Canadian wartime industrial expansion and munitions production, has singlehandedly carried through the Trans-Canada gas pipeline, has actively supported American investment in Canada, and has pushed the industrialization of Canada with ceaseless vigor. Here is Mr. Howe’s appeal to American business: —
“Anyone who does business in Canada should reckon with the pride, and the legitimate pride, of Canadians in their country. In other words, they should reckon with the normal feeling of nationalism which is present in Canada, just as it is in the United States. Canadians do not like to be excluded from an opportunity of participating in the fortunes, good or bad, of large-scale enterprise incorporated in Canada but owned abroad. They may not buy many shares, but they resent the exclusion. They do not like to see large-scale Canadian enterprises entirely dependent upon foreign parents for their research and top management. They do not like to see the financial results of large-scale Canadian enterprises treated as if they were the exclusive concern of the foreign owners.
“I make bold therefore to offer three suggestions for the consideration of United States corporations establishing branch plants in Canada or searching for and developing Canadian natural resources:–
“ 1. Provide opportunities for financial participation by Canadians as minority shareholders in the equities of such corporations operating in Canada.
“2. Provide greater opportunities for advancement in U.S.-controlled corporations for Canadians technically competent to hold executive and professional positions.
“3. Provide more and regular information about the operations of such corporations in Canada.”
Shortly after these speeches were made by Mr. Howe, I happened to attend a convention of one of the biggest American industries, which has a multibillion-dollar investment in Canada. I asked the delegates for their reaction to the Howe speeches. In three days none was found who had heard of Mr. Howe, let alone the speeches.
3
BEHIND Mr. Howe’s appeal to American business lies an economic problem which only American business can solve. That problem is the threat posed to the economic life of Canada, and friendly political relations between Canada and the United States, by the snowballing American investment, which has now reached $13 billion, and the Canadian trade deficit of $1 billion a year with the United States. Before the war, American investment in Canada was barely $3 billion. It only reached $4.9 billion by 1945 but has doubled in the last ten years and is now increasing, almost by geometric progression, at a rate of $700 million a year. Capital inflow accounts for only half that figure. The rest is made up of growth of continuously reinvested profits.
The trade deficit is accounted for by Canada’s unprecedented boom. Because much of its industry is based upon processing parts imported from the United States into finished products sold in Canada, the greater the prosperity the larger the deficit. Only the steady inflow of investments, and export surpluses elsewhere, have enabled Canada to keep her trade in reasonable balance.
But what happens to Canada’s foreign exchange position when the inflow of capital stops and Americans start taking their earnings home instead of reinvesting them? When that happens, as someday it must, Canada will face its worst exchange problem in history, with political implications impossible to predict. Canadians seeking a solution habitually point to obvious but relatively unimportant impediments to trade — high U.S. duties on wheat, quotas on beef cattle and dairy products, restriction on fish, the duty of 10 cents a barrel imposed on Canadian crude oil for the oil-short U.S. Pacific coast. Yet if all these things and more were permitted duty-free entry into the United States tomorrow, it would not begin to solve the problem.
What dams up Canadian exports to the United States is not only tariffs and quotas but the policy decisions of the American owners of so large a segment of Canadian industry. American capital owns the Canadian automobile industry; the electrical, aluminum, asbestos, chemical, nickel, rubber, paint, machinery and machine tools industries; most of Canadian petroleum production, refining capacity, and gasoline marketing; plastics, glass, and an endless variety of other manufacturing.
What keeps Canadian Fords, Chevrolets, and Plymouths from being sold throughout the United States is not tariffs or duties but policy decisions of Ford, General Motors, and Chrysler. It is neither the tariff nor patent rights that stop Canadian chemicals from being marketed extensively in Chicago, Detroit, Akron, and Cleveland. It is the decisions of DuPont, Dow, Monsanto, and Goodyear. It is not the duty on crude oil that keeps it out of the Chicago and California refineries. It is the decisions of Standard of Indiana and Standard of California not to use any of their Canadian crude in their U.S. refineries.
No Canadian branch can operate as efficiently as the American factories because none enjoys a market of similar size. If Canadian operations were integrated with American operations, the companies would benefit from greater profits from their Canadian plants. Some years ago, thoughtful Canadian economists who saw this problem arising suggested that the automobile industry was one which would lend itself most effectively to acrossthe-border integration.
All Canadian plants duplicate machinery and methods used in the United States. If General Motors, for example, decided to integrate, it could follow many possible routes. Today it makes all its Buicks in the United States and serves the Canadian market with exports. Suppose, instead of making Chevrolets and Pontiacs and some trucks in both countries, it moved all its truck-making to Canada and all its car-making to the vacated truck plants in the U.S. Sales of Canadian-made trucks to the United States might balance, exchange wise, the cost of importing American cars. What happens now is that the American parts content of every Canadian car is an exchange liability and there is no offsetting credit for anything sold to the United States.
The chemical industry, which is in its infancy, is admirably suited to this sort of international production rationalization. Instead of erecting Canadian plants to duplicate American plants, surely the logical approach would be to have Canadian plants specialize in one process while American plants specialized in others.
Some such solution as this is imperative if Canada is to obtain a vast increase in the kind of exports to the United States it must have. Canadians who agitate for greater American purchases of agricultural products—particularly wheat, meat, and dairy products—ignore the fact that the need is for high-value exports, which alone can bulk large enough to overcome the trade deficit. Ultimately Canada must convert its billion-a-year deficit into a billion-a-year surplus if American investors are to be paid interest and sinking funds on their Canadian investments. These investments are substantially represented by goods exported to Canada. They can only be repaid in goods — and high-value goods.
This problem was not created by American big business, American small business, one industry, or a group of industries, so it cannot be solved completely by automobiles, rubber, steel, or chemicals. Perhaps the problem has now grown so large that it is beyond solution. Certainly as long as thousands of Canadian branch plants are barred from selling their production in the United States by head office ukase, political discussions about tariff concessions are but exercises in applied futility.
Once that is understood, it becomes easier to appreciate the value to American industry of Mr. Howe’s second suggestion —that places be opened at the policy level for Canadian employees of proved ability. The process of converting domestic industry into a world-trading industry must begin at the policy level. The impact of even one foreigner on (he boards of directors of a t housand American companies could be important. And while the process of educating the directors proceeds, it would do no harm to follow Mr. Howe’s first piece of advice. If American industry is opened to Canadian equity investors, the external debt may be reduced painlessly right now. And it will do American industry no harm to have a small army of investors on the loose in Canada while solution to the debt problem is worked out by men of good will on both sides.