40 MONTHS TO MAKE OR BREAK CANADA

The Americans themselves are setting up our greatest chance to avoid union with the U. S. We have 40 months to go

PETER C. NEWMAN November 3 1962

40 MONTHS TO MAKE OR BREAK CANADA

The Americans themselves are setting up our greatest chance to avoid union with the U. S. We have 40 months to go

PETER C. NEWMAN November 3 1962

40 MONTHS TO MAKE OR BREAK CANADA

PETER C. NEWMAN

The Americans themselves are setting up our greatest chance to avoid union with the U. S. We have 40 months to go

LEADING BUSINESSMEN and influential politicians are standing up somewhere in Canada almost every day to advocate drastic changes which might revive our economy and restore to us the lush, easy days of the mid-fifties. Some of these men say we should join the United States. Others urge that we join Europe, through an association with the Common Market. Still others insist that we should go it alone in an economy isolated from trade. Each of these suggestions, however, has in turn been condemned by different groups of equally persuasive businessmen and politicians. To join the Americans, they say, would swamp our identity. To join Europe would be impossible — it doesn't want us. To become an economic island would amount to economic suicide.

Now, another alternative is available. It is based on a complicated and outwardly undramatic piece of legislation passed last month by the American Congress, known as the Trade Expansion Act.

What we do about President Kennedy's bill will be one of the most critical decisions in Canadian history — a decision that will almost certainly govern the future development, perhaps even the survival, of the country.

Our choice is this:

We can ignore Kennedy's trade initiative, in the hope that some other, separate trading arrangement can be made with either the Commonwealth, the Common Market. or the United States. This is unlikely, but not impossible.

Or we can accept the Kennedy plan, going after the enormous advantages it could open up for us but paying for them with some grave dislocations in our own economy.

The main advantage of the Trade Expansion Act, if it works as Kennedy says he intends to make it work, is that it could raise the potential number of customers for Canadian goods from eighteen million people to the 450 million consumers of the U. S. and ihe Common Market countries. It would do this by lowering or eliminating the tariff walls that now' separate us from these markets.

The main danger of the Kennedy scheme is that to obtain access to these greatly expanded sales opportunities, we would in

turn have to allow foreign goods into our country, where they would challenge our factories for their own domestic markets. There are other risks. We would have to find ways to hold the Americans to changes not in their tariff law's alone, but also in their customs procedures. Often in the past. Canadian trade to the U. S. has been hampered by deliberate bureaucratic interference at the border, regardless of the applicable tariffs. Beyond this, we would have to retain enough bargaining power to make the Americans stick to their part of the bargain — the act allows Kennedy to push some tariffs up as well as down, and there is no doubt that under heavy pressure from some U. S. industries — timber, say — he can be at least tempted to make peace by discriminating against Canadian products.

“THE MOST SIGNIFICANTBREAKTHROUGH”

While our final decision on the Kennedy bill has not yet been taken, it is becoming more a matter of debate than of choice. The two major political parties have already agreed to join Kennedy in his trade liberalization efforts. Lester Pearson has said that Kennedy's plan would have "the active encouragement of a Liberal government." John Diefenbaker, despite his initial hostility has praised the Kennedy proposals as being “quite in harmony with the sort of approach to current world economic problems which the Canadian government is supporting." The Conservative leader's suggestion for a world conference on trade, made to the Commonwealth Prime Ministers' meeting, was nothing more than an attempt by Diefenbaker to capture some of the credit for the Kennedy initiative.

Political reaction to the Trade Expansion Act is important, since the politicians will be responsible for the bargaining that must go on before the detailed effects on Canada become clear. If we don't bargain skillfully, the Americans could use their legislation to strengthen their position at our expense. And if we're to sit at the bargaining table with a case that will give us all possible safeguards and advantages, we'll have to go to work on the details right away. The changes in Atlantic trade the Kennedy plan is intended to bring about are scheduled to start coming into effect early in 1965, just forty months from now.

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“The biggest thing to happen since we became a nation”

“This is the biggest thing that's happened to Canada since we became a nation,” says Brig. James Roberts, the federal deputy minister of Trade and Commerce who has gained a reputation as one of Ottawa's more enlightened economic thinkers. “Jt could be the most significant breakthrough yet in Canada's attempts to surmount the structural obstacles which have plagued our foreign trade for generations. But it will also throw us deeper into the sphere of American economic influence. The battle to preserve a Canadian identity is reaching a crescendo.”

A reading of the sixty-one-page Trade Expansion Act which has caused all this furor is deceptive. The bill appears to concern itself only with granting wide tariff-cutting powers to the American president. But in its potential effects, the new legislation is the boldest initiative yet attempted to demolish world trade barriers. “Jt will affect three continents, engrossing half of the world's land surface and more than half its population,” Joseph Kraft, the American historianjournalist has written. “Jt will demand transfers of capital that make the present flow look a pittance. It will last this century and beyond. In the non-Marxian sense at least, the process of change will almost certainly be revolutionary.”

The Trade Expansion Act represents President Kennedy’s answer to his election pledge to get the American economy “moving again.” Its main effect will be to multiply the flow of goods from the U. S. to the Common Market countries through a series of drastic tariff reductions between these giants of world trade. “But,” Kennedy has insisted, “I am not proposing that we establish a ‘rich man’s’ trading community, or impair in any way our close economic ties with Canada, Japan and the rest of the free world.”

If Mr. Kennedy’s grand design is to be realized, the Atlantic basin countries (plus Japan) must decide to support the Trade Expansion Act. By doing so — and proving the worth of their willingness through equivalent tariff reductions — they will gain access to the rich markets of the U. S. and the Common Market countries. Taken to their logical conclusions, the measures proposed in the Trade Expansion Act would create a thriving economic community of nations, including Canada, able to give more effective aid to the underdeveloped (and politically uncommitted) continents.

Coming closer to home, the Kennedy bill holds tremendous implications for the Canadian economy. Its potential effects can be calculated only against a background of the trading difficulties into which we have drifted during the past five years. Economists who have examined this problem conclude that we face a bleak future in international trade. They base this prediction on a fairly self-evident checklist of assumptions: * Our traditional export outlet in Britain for nearly a billion dollars' worth of goods is threatened by the United Kingdom’s application for membership in the European Common Market. Despite the current squabble over British entry, most international observers still believe that the U. K. will join Europe some-

time in 1963, a move that would adversely affect from two thirds to one half of our exports to the U. K., which have been sold under Britain’s preferential tariffs.

The search to find alternate export markets for our goods has reached something of a dead end. To the east arc the rising tariff walls of the Common Market; to the north, growing competition from Russia and her satellites in the very raw materials which have been our staple exports;

to the west the galloping economies of Japan and Hong Kong with wage costs one fifth of ours; and to the south, the rich American market, denied to most of our industrial products by high tariff barriers.

^ Canada will not join the European Economic Community. The Treaty of Rome which set up the Common Market includes a clause under which Canada might technically qualify as an associate member. But quite apart from the fact that none of the Euro-

pean nations which would have to approve our entry have given any sign of being willing to do so, it’s doubtful if we could afford such an association. With most of our exports redirected to Europe, we couldn’t pay for that sixty-seven percent of our imports which we buy in the U. S.

^ Canada’s economy is becoming increasingly isolated in a world rapidly rearranging itself into powerful trading blocs. Instead of being able to enjoy the advantages of large-scale production and mass distribution which come with membership in one of these blocs, Canadian manufacturers are being hemmed into a small domestic market, spread over an immense geography.

•" Despite this involuntary trend toward economic isolationism, for a country like Canada to retreat into a sheltered, insular existence amounts to national suicide. Economists calculate that our standard of living is now from twenty-five to thirty percent below that of the U. S. They predict that this differential would quickly increase if we decided to isolate our economy, because of the inevitable rise in consumer prices and resultant government subsidy requirements. Such a margin of inequality would probably prompt a massive exodus of Canadians to the U. S. As it is, a net average of ninety-eight Canadians emigrate to the U. S. every day.

This cheerless recounting of our current trade dilemma emphasizes the potential importance of the American Trade Expansion Act. If Canada decides to support the Kennedy initiative, the tariff reductions that follow will give our manufacturers greatly enlarged access not only to the huge market of the United States, but to the European Common Market as well. Instead of being limited to Canada — where consumer expenditures last year totaled not quite $25 billions — our industry will gain access to consumer markets worth an annual $560 billions.

Specifically, the Trade Expansion Act grants the American president power to reduce tariffs in three broad areas:

1. All U. S. tariff rates can be cut by fifty percent in reciprocal negotiation with other countries. The générai categories to which this kind of bargaining would apply in Canada’s case include most industrial products, plywood, shingles, aluminum products, steel, whisky, copper, lead and zinc. A total of $400 million of Canadian exports to the U. S. comes under this heading.

2. All U. S. tariff rates currently at five percent or less can be reduced to zero. This would provide free entry for such important Canadian exports as nickel, lumber, salt, maple sugar, salmon, cod, haddock, fibreboard and cattle hides. Ottawa officials estimate that Canadian exports worth at least $500 millions would benefit from this clause.

3. All American tariff rates can be negotiated down to zero on items in which the U. S. and the Common Market countries (after Britain’s entry) account for eighty percent or more of free world exports. Canadian trade which falls into this group includes railway rolling stock, leather goods, metal-working machinery, organic chemicals, office machines, cars, coal and electric machinery. Annual Canadian exports to the U. S. of these and other items which would qualify, amount to about $200 millions.

Department of Trade and Commerce officials in Ottawa estimate that implementation of tariff cuts in these three categories would drastically reduce the duties Canadian exporters now have to pay on at least $1.1 billion of the goods they ship to the U. S. Raw materials worth approximately $1.5 billion a year already move to the U. S. duty-free, under existing agreements. This means that with action on the new Kennedy bill, about $2.6 billions of our total annual exports to the U. S. — or about eighty-seven percent of everything we sell south of the border — could gain free, or almost free entry. And because Kennedy intends to apply his tariff cuts to the entire Atlantic area, we'd have similar access to the merchandise-hungry customers of Europe.

The catch in all this, of course, is that the American president will not grant these tariff concessions for nothing. In return Canadian tariffs, which protect our industry against the influx of foreign goods, will also have to be drastically slashed or eliminated. Most secondary manufacturers in Canada now have tariff protection of between ten and twenty-five percent. .Spokesmen for Canadian industry have insisted since long before Confederation that such tariff walls are essential to keep them in business. They say that the small domestic market won't allow them to compete against manufacturers in other countries who enjoy the cost-cutting efficiencies of long-run production lines. “For a country so far from potential industrial development as we, reducing tariffs would be the kiss of death,” Carl A. Pollock of Kitchener, president of the Canadian Manufacturers’ Association, said recently. “Without tariffs, Canada would become the Siberia of North America,” he added for emphasis.

Despite such vehement insistence that tariffs are as important as ever, economists have begun to question this thesis. They argue that the effect of tariffs has been to divert.Canada’s growth into uneconomic industries. “Protection promotes inefficient allocation of resources and fosters inefficiently small production units, thus reducing Canada’s standard of living,” claims Prof. Harry Johnson, a Canadian w'ho has become a leading economist at the University of Chicago.

Another argument used by the protectionists is that tariff reductions would disrupt the east-west flow of the economy, which according to every history textbook is the binding force that has kept this country independent. This concept, too, is now coming under critical scrutiny. Some economists argue that the artificial channeling of our trade in the eastwest direction has been a divisive rather than cohesive force. They say that the east-west trading pattern has seriously damaged the spirit of Canadian unity by forcing the citizens of the Maritimes and Western Canada to buy high-cost Quebec and Ontario manufactured goods, when they could get them cheaper from Boston or Seattle. (The cost to Canada’s consumers of the tariff wall to keep out cheaper foreign goods has been estimated by Prof. J. H. Young, of the University of British Columbia, at about a billion dollars a year.) The measure of the importance of Canada’s tariff wall to the safeguarding of national independence — which is maintained by more than the mere flow of trade goods — is one of the prime questions which will have to be answered before we formulate our reaction to the Kennedy plan.

The American president has stated his intention of carrying on his tariff bargaining through the General Agreement on Tariffs and Trade (GATT) organization in Geneva. GATT negotiations arc incredibly complicated. It took the organization two years, for example, to come up with a definition of the word “category” acceptable to its fifty member nations. GATT agreements are always negotiated between the two countries most concerned in the tariff being discussed. but the resulting tariff reduction or increase is applied to all the member nations of the organization. This means that the concessions which the Common Market countries and the U. S. agree to grant each other (according to the formula in the Trade Expansion Act) will be given to Canada — in return for equivalent concessions from this country. It’s not clear exactly what we’ll have to surrender in order to gain the tariff cuts. “But,” says one high Department of Trade and Commerce official, in the best GATT jargon, “we’ll certainly have to leave something on the table.”

An examination of U. S.-Canadian trade shows that only thirty-eight percent of American goods comes here

without tariffs, while more than half of Canadian goods already enter the U. S. duty-free. But this over-all percentage conceals the fact that about eighty percent of American exports to Canada are manufactured goods, while eighty-five percent of Canadiaa exports to the U. S. consists of ri;7 materials or goods close to thëu primary stage, like newsprint, lumber, pulp and metal ores. The balance between the two countries in the trade of manufactured goods is painfully uneven.

Canadian industry is handicapped in international trade by high production costs. A study done for the Gordon Commission by D. H. Fullerton and Anthony Hampson estimated that nearly three quarters of the cost differential is accounted for by the inefficiencies of short production runs. When factories are limited to producing goods for a market of eighteen million people, they can’t take advantage of the economies inherent in mass production. Machines have to be set up at short intervals to turn out the small quantities of each model required; overheads cannot be spread over a volume great enough to reduce fixed costs. Canada’s “scale of production” is further hampered by the fact that despite the smaller market, there are many individual companies within an industry, each attempting to capture its share. In the U. S. for instance, factories that turn out refrigerators have an average annual output estimated at 275,000 units each. Last year in Canada, the total production of 240,500 refrigerators was made by ten factories. As a result, none of the Canadian plants could take advantage of the economies of long production runs, and Canadians have to pay considerably more for refrigerators than Americans.

In trying to compete with European countries, we have the added disadvantage of higher wage rates. (The average industrial worker in the Common Market countries gets the equivalent of 55c an hour, compared with Si.89 in Canada, and $2.39 in the U. S.) But there is a very real possibility that some Canadian industries could gain enough advantage from the longer production runs of a vastly larger market to compete effectively, even with our wage structure. F. R. Daniels, president of Montreal's Dominion Textile Company, for instance, has predicted that his firm could successfully penetrate the U. S. market, providing it had two years to drop short-run fabrics and concentrate on mass producing a few lines.

S. J. Randall, president of Toronto's General Steel Wares Limited, which makes a wide range of household utensils and appliances, recently told a friend: “In New York, you can reach nearly nine million people—half of Canada’s population—with a subway ticket. I’d have to cut the number of my lines, put three shifts on to get longer runs, and sell in New' York instead of B. C. But I could do it.”

Canadian manufacturers would start with one decisive advantage in switching over to a north-south instead of east-west trading pattern. Nearly 80 percent of Canada’s factories are located in a border-hugging strip between Windsor, Ont., and Quebec City. This puts them close to American markets, adequate power facili-

ties. and a good transportation network. yet their average manufacturing wage rates are twenty-one percent below those of the U. S. "Many Canadian cities might acquire positions as continental centres for different types of industrial activity,” says Roy Matthews of the National Industrial Conference Board, an independent business research organization in Montreal. "Just as Pittsburgh is the steel centre for the entire U. S. A., so Montreal, Toronto and Vancouver might each develop a similar special status as suppliers of certain products for the whole of North America.”

Many Canadian firms have already established their ability to barge successfully into the U. S. market, either by establishing subsidiary plants behind U. S. tariff barriers (Carling Brewing Inc. of Cleveland, a subsidiary of Canadian Breweries Ltd., is now the fourth largest beermaker in the U. S.) or by selling directly into the American market and absorbing existing tariffs. (Clairtone Sound Corporation, a Toronto manufacturer of high-quality phonographs, now sells half its daily production of 140 sets in the U. S., despite stiff competition in its field). Other examples include Canada Packers, which has recently opened feed plants in Illinois and Georgia, and Moore Corporation, the Toronto form firm, which sells eighty-five percent of all the business forms it manufactures to U. S. customers. Moore now has twenty-seven plants in the U. S. to eight in Canada.

The Trade Expansion Act w'ould also have important effects on our raw materials trade, by allowing a greater degree of processing on this side of the border. Under existing tariffs the U. S. rate rises sharply, according to the amount of processing. Wood pulp, for instance, goes to the U. S. duty free, hut book stock and writing paper are burdened with an eight to ten percent tariff. As a result, our exports of wood pulp to the U. S. last year w'ere worth $269 million, while book and writing paper exports amounted to only $6 million. In fact. Canadian plants can sell such small amounts of this kind of paper at home that their prices are far higher than American prices for the same paper, and the Canadian paper has to be protected by a 22,/2% tariff. (The most blatant consequence of this tariff arrangement is the operation of the Fraser Companies mill in New Brunswick. Wood pulp is processed at Edmundston, then piped a short distance across the border to Madawaska, Maine, where it’s manufactured into paper. Naturally, this creates more jobs for Americans than Canadians, although the operation is based on our pulp.) The tariff reductions under the Kennedy bill would offer a real chance to have more processing of raw material carried on in Canada, particularly in the pulp and paper, chemical and aluminum industries. We could, for example, export steel bars instead of billets, aluminum shapes instead of ingot. That amounts to only one further step in processing, but it would create a great deal of extra employment.

Despite the advantages of the Kennedy bill, many Canadian industries (and with them many Canadian communities) would undoubtedly be hit hard by the forced reorientation of our economy into a predominantly north-south trading pattern. To offset these effects, the Canadian government would have to initiate the unprecedented intrusion into the country’s economy. The similar disruption caused in European national economies by the formation of the Common Market has been handled by giving displaced industries help to re-establish themselves in other lines or other locations, through a Social Fund and Investment Bank established under the Treaty of Rome. Because the flood of foreign imports, which is expected to follow implementation of the Trade Expansion Act. will have drastic effects on American business as well, Kennedy has included in his legislation a complicated system of temporary adjustment assistance to help some industries switch to new products. Significantly, the program does not include enough subsidy assistance to save factories or segments of industries which are so marginal, obsolescent or inefficient that they would sink under a wave of imports from lower-wage countries.

A lew officials in Ottawa arc already quietly at work on the kind of assistance scheme the federal government might launch, if we were to participate in the Trade Expansion Act. Among the steps they are drafting is a comprehensive program for retraining workers, providing cash compensation for the dislocation of factories, and “trade adjustment allowances” for plants closed as a result of the tariff cuts. “We may have to finance unemployment for the next few years by paying people to stay idle until the economy readjusts to new conditions,” says Eric Kierans, president of the Montreal Stock Exchange. Kierans points to the French textile industry as an example of how to reorganize a business hurt by tariff concessions. When the formation of the Common Market wiped out most of the tariffs that had protected France’s textile firms, one third of the mills were forced to close. But the industry regrouped itself to concentrate on the few products in which it has economic advantages, and is at the present time

enjoying unprecedented prosperity.

One factor which considerably complicates the adjustment of our economy to the lowering of AmcricanCanadian tariffs is that ninety percent of all factories in Canada with five thousand employees or more are controlled by U. S. parent corporations. That’s why the government would have to devise industrial agreements that would provide meaningful incentives for American corporations to keep manufacturing a set percentage

of their products on our side of the border. This would be necessary even though Canadian tariffs, w'hich prompted the establishment of most of the American plants here in the first place, will have been eliminated. One practical option for American manufacturers would be to convert their branch plants here to one particular line or component, and sell it in both Canada and the U. S.

Canadian industry w'ould similarly have to streamline its methods. One

change, imperative if we go along with the Trade Expansion Act, would be some kind of government planning agency to carry out the economy’s reorganization. “In plotting the transformation of the Canadian economy,” suggests Roy Matthews of the National Industrial Conference Board, “we should pattern ourselves on such countries as Sweden or the Netherlands, rather than trying to create a smallscale version of the United States. If the reorientation is not to be too traumatic, we'll have to develop a coordinated approach, possibly along the lines of the French Plan.”

Another of the major changes which will certainly have to follow our involvement in the Kennedy plan is a drastic revision of Canada’s combines laws. Instead of looking with dark suspicion on co-operative efforts by Canadian firms trying to adjust to the new' business climate, the federal government will actually have to encourage the formation of larger manufacturing units, able to withstand the competition of the giant industrial complexes of the U. S. and the cartels of western Europe. Sympathy for this proposition came from an unexpected source during a conference held last summer at Mount Allison University to discuss the nation’s trade problems. Speaking in support of the Trade Expansion Act, Russell Bell, the assistant research director of the Canadian Labor Congress — a traditional enemy of big business — came out for the reorganization of Canadian industry into larger units. “The merging of small and inefficient firms into larger efficient units would not lead to monopolies if we, in conjunction with the U. S. and the EEC, maintain the lowest possible tariffs,” Bell declared. “Under such liberalization of trade, our industries would be subject to ample foreign competition.”

Every businessman and labor leader sees both advantages and perils in the American scheme, according to his own interests.

One of the important cushions which would help ease the adjustments required in the Canadian economy is the time factor. Providing Britain enters the Common Market during 1963, the first round of GATT negotiations based on the U. S. Trade Expansion Act is not expected to begin until sometime in 1964, with the actual tariff cuts coming into effect, probably early in 1965—about forty months from now. The decisions we take during those forty months could make or break Canada. ★