The Impact of American Business

There is no doubt that American investment in Canada has contributed greatly to the growth of the Canadian economy. For an estimate of the by-products of this investment, we have turned to ROBERT M. FOWLER, a Montreal lawyer and businessman. Mr. Fowler has been president of the Canadian Pulp & Paper Association since 1945. He is also co-chairman of the Canadian-American Committee.

AMERICANS doing business in Canada tend to pay us the compliment of treating us as if we were just part of the family. Some time ago a charming and intelligent American businessman at a conference in Canada explained that he had five plants in the United States and two in Canada and he treated them all exactly alike — they were all branch plants. He is probably still wondering why the Canadians present objected to his statement.

By contrast, when American businessmen go to Mexico or France or Germany, they are well aware that they are foreigners, and conduct their businesses, often with local partners, with an eye to the sensitivities of the people and the government. They consciously avoid behavior that might be considered contrary to the national interests and welfare of the country where they are doing business. But when an American businessman comes to Canada, he does not consider that he is in a foreign country, and he often acts as if he were at home. This, in a very real sense, is a compliment to us and a tribute to the special relationship that exists between our two countries. But I think it is a mistake. We are a foreign country, and we want to remain so, even though we have, and seek, the most friendly relations with the United States and with individual Americans.

For Canadians, the United States is a daily preoccupation and concern; we have some real problems of Canadian-American relations and perhaps some imaginary ones; it is easy for us to exaggerate our difficulties and become touchy in our attitudes. For Americans, Canada is of little daily concern; you think of us rarely, and when you do, you tend to regard Canadian-American problems as really no more serious than relations between New York and California or between the Midwest and Florida; you have a great many things that seem more pressing to worry about.

Yet this international relationship is obviously important to us because our living and perhaps our life depend on it. It is also important to the United States to have Canada as a free and always friendly neighbor. The chances are that on most major issues in world affairs, we will think as you do and be your loyal ally. But that support is of greater value to the United States if it comes from a strong and independent country, not a satellite. If sometimes we differ with you, our views may be worth considering, and occasionally you may conclude that we are right. The preservation of a free Canada is of vital interest to the United States.

Threats of active aggression ceased long ago, and no one in Canada now has any fear that the United States will send in the Marines. The danger you pose for Canadian independence is that you might gradually and unconsciously extend your influence and your culture until Canada becomes an indistinguishable part of the United States. American influence in Canada is already extensive and pervasive, being exerted directly and continuously through mass media and indirectly through extensive ownership by Americans of Canadian natural resources and industry.

The Canadian economy has grown rapidly since the war, and there is no doubt at all that American investment in Canada has contributed greatly to that growth. In market dollars, the Canadian GNP increased from less than $12 billion in 1945 to about $43 billion in 1963. It has meant an increased population (from about 13 million to more than 19 million in the same period) and a rising standard of living for all Canadians.

With this development going on at their doorstep, American investors who know a good thing when they see it and are willing to take some risks came to Canada with large amounts of money. They started ventures, many of which would not have been started by Canadians, or at least not started so soon. In the process, they brought to Canada technical skills and the fruits of American industrial research, and they created markets for Canadian products that might not otherwise have been available. They provided employment to Canadians, bought large quantities of goods and services, and paid ever increasing taxes to Canadian governments. Apart from the inevitable mistakes and failures, one could examine any one of these American-financed ventures in Canada and conclude that it was good both for the investor and for Canada. What, then, is all the fuss about?

IT IS the sheer size of the total American investment in Canada that worries some Canadians and a few of their political leaders. Total U.S. investment in Canada was nearly $20 billion in 1962 and is undoubtedly higher today. Nearly two thirds of this is in the form of “direct investment” — that is, ownership of subsidiary companies in Canada. This investment is heavily concentrated in the resource and manufacturing industries. The latest available figures indicate that Americans control 95 percent of the Canadian automobile and automobile parts industry, 89 percent of rubber products, 64 percent of electrical apparatus, over 50 percent of the chemical industry, 43 percent of pulp and paper, 70 percent of the petroleum and natural gas industry, and 52 percent of mining and smelting; and for all manufacturing industry in Canada, nearly 50 percent.

Such a concentration of foreign investment has never been equaled in any other country except where there was a colonial relationship or some dependency status. In our case it was not, of course, caused by colonialism, but by the fact that the emergence of the United States as an exporter of capital coincided with a surge of economic development in Canada. But it is not surprising that some Canadians began to feel like “colonials” and to believe that something should be done to resist the friendly pressure from the United States that seems likely to engulf us.

Canadians have been hunting around for several years for specific objections to the conduct of foreign investors in Canada. We say, for example, that American subsidiaries do not employ enough Canadians, especially in senior management positions. That they do not have independent Canadian directors. That they tend to buy their components and services from the United States rather than from available Canadian sources. That they do not allow Canadians to buy shares in companies that exploit Canadian resources and markets. That they do little research in Canada and do not contribute generously to Canadian charities. And that they are restricted by their parent companies from making vigorous efforts to increase Canadian exports.

These attempts to identify the supposed shortcomings in the performances of American subsidiaries in Canada have been notably unsuccessful, and one is forced to the conclusion that there is very little substance in these complaints. Admittedly the statistical information is inadequate, and accurate facts about company performance are hard to come by. But from such studies as have been made and from individual knowledge, there seems to be no correlation between good or bad performances under any one of these headings and ownership or control of Canadian companies. Undoubtedly one can find some examples of American subsidiaries that do not buy as much as they could buy in Canada, that do not do any research here, that are niggardly in their charitable giving, and that do not export. One can find others that do all these things and do them well. And, if one looks, one can find an equal number of companies owned and controlled by Canadians, in the same industries, whose performance on each of these fronts is just as deficient. Performance seems to be an individual matter that has little to do with where the ownership is held.

But there is a difference in the public reaction to a shabby performance by an American subsidiary and one by a Canadian company. When a Canadian company acts in a way that is thought to be contrary to the national interest, it is simply regarded as a bad Canadian citizen. When an American subsidiary misbehaves by Canadian standards, its record is used to brand the whole tribe of American investors. When an absentee owner fails to take account of legitimate Canadian objectives, the criticism is both specific against the individual failure and general against absentee ownership as such. What all this means is that American subsidiaries in Canada need to achieve higher standards of performance and pay greater attention to Canadian susceptibilities and national objectives than purely Canadian companies need to do. They should do so because they are operating in a foreign country.

However, there is only one really valid reason why American subsidiaries in Canada should have independent Canadian directors, do real research in Canada, and, where possible, have some Canadian shareholders. It is because it is usually in their own enlightened self-interest to do so, not because they should feel they have to placate a lot of unreasonable and troublesome Canadians.

Despite the many similarities between the United States and Canada, we have a different constitution, different laws, and somewhat different public attitudes and objectives. Corporate decisions that do not take account of these differences are likely to be less good than those that do, and therefore the subsidiary company is likely to be less successful and less profitable than it might be. Canadian directors and Canadian shareholders can reflect national attitudes and objectives in the company’s decisions. Research done in Canada is most likely to meet actual market needs and preferences, and may on occasion produce new methods or products useful also to the parent company. These things are not a question of good manners but of sound business judgment.

In discussing those cases where the performance of American subsidiaries is somewhat less than what is desirable in Canada’s interest and in their own self-interest, I want to make it very plain that these are the exception rather than the rule. The performances of the vast majority of American businesses in Canada are good-better than those of many Canadian firms, better than they were a few years ago before Canadian discussion and agitation drew the problem repeatedly to their attention. Many American businessmen who remain American citizens and who head subsidiaries in Canada are active and public-spirited leaders. American subsidiaries bring us a great many good men.

They add immensely to Canadian life by their presence and by their many public activities in Canada. If I were asked to pick out the two businessmen in Canada who have contributed most to Canadian life in the last twenty years, I would choose two Americans who came as heads of subsidiary companies, are now Canadian citizens, and take an active part in every worthwhile business, cultural, and social activity year after year. Each runs a company that is both successful and a good corporate Canadian citizen.

Another advantage gained from the presence of American businessmen living in Canada, one that we seldom recognize, is the constant flow of information about Canada and Canadian attitudes running back from the officers of the subsidiary to their associates in the United States. This information generally gets to places where it matters. And on the theory that there is no zealot like a convert, these American Canadians express the Canadian point of view more vociferous and more effectively than any native Canadian would dare to express it. We may complain that Americans know too little about Canada, but certainly American consciousness of Canada would be much less today than it is if we did not have these lines of communication between subsidiary companies and their parents in the United States.

CANADIAN concern about the extensive American ownership of Canadian industry has led to a number of proposed steps to deal with the problem that is thought to exist, and a few pieces of legislation. There was a proposal in the budget of June, 1963, that a 30 percent tax should be levied on certain security sales by Canadians to nonresidents, to prevent further “takeovers” of Canadian businesses. This proposal was quickly withdrawn as administratively unworkable.

The same budget also proposed that to encourage Canadian ownership, the 15 percent withholding tax on dividends paid to nonresidents should be reduced to 10 percent for companies that have at least 25 percent of their shares owned by Canadian residents, and increased to 20 percent for companies that have less than 25 percent Canadian ownership. Depreciation on new machinery and equipment was to be accelerated in certain cases for companies having 25 percent Canadian ownership. To qualify for the lower withholding tax and for accelerated depreciation, companies must also have at least a 25 percent representation on the board of directors by resident Canadians. All these proposals were substantially modified before they were enacted. The tests laid down for Canadian participation were made easier, and the increase in the withholding tax to 20 percent was abandoned, so that the spread between companies with the required Canadian ownership and those without it was reduced to 5 percent.

There are many Canadians who seriously doubt both the wisdom and effectiveness of such measures. Their impact can usually be avoided with comparative ease and sometimes with results that were neither intended nor desired. More important, their chance of effectively improving the Canadian performance (which is their stated objective) must be very close to zero. An effective Canadian influence is not created by restricting one nonresident owner to less than 75 percent of the voting shares. There may be a strong Canadian influence exerted by a 5 percent holding, or there may be little or no influence exerted by a 45 percent holding. It all depends on the abilities and active interest of the minority shareholders. In any event, as Professor Harry G. Johnson (a Canadian economist now at the University of Chicago and one of the shrewdest commentators on Canadian-American relations) puts it: “There is no substantive evidence that American enterprises in Canada have acted contrary to the national interest, and if any such behavior should occur or threaten to occur, Parliament, and not a group of Canadian shareholders foisted on the foreign companies by fiscal discrimination or political blackmail, is the appropriate guardian of the public interest.”

There is much to suggest that Canadian efforts so far developed to deal with the real or imaginary problems of American subsidiary performance are misconceived and damaging. So probably are discriminatory laws by Congress, such as the recent U.S. Interest Equalization tax. Both countries have greatly benefited from their traditional policy of maintaining a common market for capital in North America. It has introduced flexibility and efficiency in their economic development. As the time approaches, quite rapidly, when Canada will become a substantial exporter of capital, we may become less dependent than we are today on a net inflow of American capital. Even so, capital resources in both countries are likely to be more efficiently applied if American money is free to enter Canada, without discrimination, to do jobs for which Americans are qualified, and if Canadians are free to take their money to the United States and other countries to do jobs for which they have special experience and skills. It seems a little inconsistent for two countries which are now busy trying to achieve freer trade in goods and are maintaining considerable freedom in the movement of people and ideas across the border suddenly to begin to destroy the free trade in capital which has existed for years and has served them both well.

THERE are, I believe, only two real problems of any substance created by American-owned companies in Canada. One is a rather technical, infrequent, and probably temporary irritant in Canadian-American relations. The other is more general, basic, and long-term in its consequences.

The short-term irritant is the application of the U.S. Trading With the Enemy Act to foreign affiliates of American companies. As an independent nation, our trading policies toward Communist countries may be somewhat different from American policies. We are very careful to see that strategic materials do not get into the hands of potential enemies, but we may feel that it is a good idea to sell foodstuffs and industrial machinery and other nonstrategic goods to Communist China or Russia. We do not suggest that the United States is wrong and should change its trading rules, but Canada claims the right to make its own rules without interference from American laws. At the moment, a Canadian subsidiary of an American flour milling company cannot sell Canadian-made flour to China without putting the president of the American parent company in danger of being sent to jail. A Canadian company is unable to trade in full compliance with Canadian laws because of the extraterritorial effect of an American statute.

It is very irritating to Canadians to have American-controlled companies in Canada used in this way to implement American foreign policy. It would be a considerable contribution to better Canadian-American relations if Congress would remove this irritant and allow affiliates in Canada of American parent companies to export under the same conditions as Canadian-owned companies. Obviously, in doing so, Congress should guard against American firms using their Canadian subsidiaries for the deliberate purpose of evading American laws.

The second problem of subsidiaries in Canada is more subtle and more important, and its solution depends on the adaptation by American parent companies to a basic change that is occurring in Canada’s trading position in the world.

The problem is this. For most of the period since World War II, a large part of Canadian economic growth was financed by imports of capital, mainly from the United States. Canadians were either unable to save enough or unwilling to devote enough of their savings to achieve the full growth they wished to have.

Whenever Canada is in a period of rapid expansion. we find we have a large merchandise trade deficit and also a large nonmerchandise deficit. Indeed, the inflow of capital that increases our rate of growth contributes substantially to these deficits, and since most of the foreign investment comes from the United States, the deficits on merchandise and nonmerchandise account are mainly with the United States. When Americans come to Canada with money to invest, they bring with them American technology and services to help make that investment. Imports of American machinery and industrial goods increase; so, also, when Canada is prosperous, do our purchases from Americans of oranges and fresh vegetables and motorcars and consumer goods. There are more Canadians who enjoy and are able to afford to take their holidays in Florida, California, and Hawaii than there are Americans who come to fish and hunt and travel in Canada. Because foreign investment has increased, we have to pay more interest to foreign — mainly American—investors.

In the last ten years Canada’s deficit on current account in its business dealings with all countries has averaged a billion dollars a year (although there has been some improvement recently). That in comparable terms would be equal to an annual deficit of about $13 to $15 billion for the United States. This deficit results entirely from our transactions with the United States. Indeed, with the rest of the world we sold more goods and services to overseas countries than we bought from them. But this trade surplus was more than eaten up by the fact that we bought more goods and services from Americans than we sold to Americans. In 1963 we were in deficit to the United States alone on current account by over $1150 million, but to all other countries by only a little over $500 million.

This trade in both goods and services is important to both countries. It is the largest flow of trade between any two countries in the world. The United States sells more to Canada each year than it sells to Great Britain, or to the countries of Western Europe combined, or to all of South America. These American goods and services are important to Canadians not only because we want them to maintain our standard of living but because, in many cases, we need them as essential components in the Canadian industrial machine. It would be damaging to both countries if this mutually advantageous trade had to be cut down.

In the future, Canada almost certainly will continue to need substantial amounts of foreign investment to maintain its growth. We can, and should, develop more savings in Canada to finance more growth ourselves, and it may well be that for a variety of reasons foreign money will not be as freely available to us as it has been in the past. Moreover, we are approaching the time when Canada, while continuing to import capital for certain types of development, will become a substantial exporter of capital also.

On all counts, Canada needs to increase exports relative to imports, and it is clearly better for everyone if it does so by expanding exports rather than cutting down imports. A natural direction for increased exports is the American market, where Canada has some competitive advantages based on American technology and somewhat lower wage levels.

Traditionally, our large exports to the United States have been raw materials and semiprocessed goods—lumber and pulp and newsprint and iron ore and base metals. These basic commodities enter the United States with few, if any, tariff obstacles, and their volume will grow steadily as American needs and population grow. But the trade in these traditional exports will not grow fast enough.

We must sell more manufactured goods in all exports markets — and, in particular, we must sell more manufactured goods in the United States. The big question is, will Canadian subsidiaries of American companies be able, and will they be permitted, to do so?

Undoubtedly, many of them were never expected to sell in the U.S. market. Their parent companies found themselves excluded by the Canadian tariff. They set up Canadian production to supply the growing Canadian market and perhaps to ship to British and Commonwealth markets on more favorable terms. They never thought of their Canadian ventures as being able to get their goods into the United States, partly because of American tariffs and partly because this was not what they were established to do.

However, if American leadership is successful, existing trading arrangements may be drastically changed and tariff obstacles may be reduced. Both American and Canadian tariffs may be cut down in the coming negotiations at Geneva. This will make it necessary for all Canadian companies to improve their efficiency and specialize in the kinds of production for which they are suited in order to trade in world markets rather than in a heavily protected domestic market.

Will American subsidiaries in Canada take part in this necessary process of quite violent adjustment? Will they make changes to meet a new trading situation which they never contemplated when they came to Canada? Will their parent companies in the United States allow them to sell in the U.S. market, even in competition with the parent companies themselves? Alternatively, will they reorganize their total production so as to develop in Canada certain specialized lines of production to supply not only the Canadian market but also markets in adjacent areas of the United States?

These questions cannot be answered by Canadian or American legislation. But the answers given to them by Canadian subsidiaries (and their American parents) will be a test of their awareness of Canadian problems and their full participation in Canadian affairs.