HOW THE U.S. COULD RUIN CANADA

Will Canada’s determined stand in the contentious Mercantile Bank affair trigger American retaliation? Just how independent of the U.S. can we really afford to be without inviting economic disaster? What could an angry Washington do to us? Here are the dangers we face as the vulnerable neighbor of a giant

Blair Fraser May 1 1967

HOW THE U.S. COULD RUIN CANADA

Will Canada’s determined stand in the contentious Mercantile Bank affair trigger American retaliation? Just how independent of the U.S. can we really afford to be without inviting economic disaster? What could an angry Washington do to us? Here are the dangers we face as the vulnerable neighbor of a giant

Blair Fraser May 1 1967

HOW THE U.S. COULD RUIN CANADA

Will Canada’s determined stand in the contentious Mercantile Bank affair trigger American retaliation? Just how independent of the U.S. can we really afford to be without inviting economic disaster? What could an angry Washington do to us? Here are the dangers we face as the vulnerable neighbor of a giant

Blair Fraser

WHAT COULD, OR WOULD, a really angry United States do to impair the economy of Canada?

No politician would put it so bluntly, lest he offend the sensitive vanity of Canadian voters, but that question underlies the split in the Pearson cabinet and the Liberal Party, most recently exposed by the dispute over the American-owned Mercantile Bank. Walter Gordon, ex-Minister of Finance and outspoken economic nationalist, leads the more defiant school of thought. Mitchell Sharp, Minister of Finance, former civil servant, former vice-president of a Canadian company operating abroad, leads the counselors of prudence and accommodation.

Neither expects any direct, deliberate reprisal by the United States government. No matter what Ottawa might do to the First National City Bank of New York, Mercantile’s owner. American troops will not occupy Canada as they did the Dominican Republic in 1964, nor will American aid unseat the Canadian government as it did the Guatemalan 10 years earlier. Canada will not be isolated by any such economic boycott as the one that still cuts off Castro’s Cuba from the U. S. and its more docile friends. Whatever danger does exist for Canada is indirect, and more subtle.

Canada has a deficit in her current accounts with other nations that in 1966 ran just under, and in 1965 just over, one billion dollars — roughly 40 percent of our entire reserves of gold and foreign exchange. The only thing that prevents this annual drain from bankrupting the nation is the steady inflow of American capital. If anything blocks or sharply reduces this flow of investment, Canada is thrown into an immediate financial crisis that devalues the Canadian dollar — as happened in 1962 and nearly happened in 1963.

This is the gravest external danger to Canadian prosperity, but by no means the only one. Several of Canada’s most vital industries depend directly on American goodwill.

Alberta’s affluence depends on exporting oil for which the United States is the only market. Access to this market is assured by special arrangements whereby, in effect, Alberta oil is treated in the U. S. as if it were domestic rather than foreign.

British Columbia relies heavily on American buyers for its major product, lumber, a highly competitive commodity of which there are many American suppliers. Recurrent attempts are made in the United States Congress to raise tariffs, lower quotas, or harass Canadian exporters by nuisance regulations (e.g., that every board and beam of imported lumber be stamped with the name of its country of origin). Up to now such restrictions have been either defeated by a friendly Congress, or vetoed by a friendly White House. If both become unfriendly, Canada could no longer count on such gentle treatment.

Ontario’s auto industry, wholly owned (except for some minor-parts factories) by American parent companies, is now heavily dependent on the complicated, narrowly limited, free-trade agreement in autos and auto parts that was concluded between Canada and the U.S. in 1965. This agreement is up for review in 1968; meanwhile, even within its existing terms, a falling off in car sales in both countries is making its implementation difficult. Hostility would make matters worse.

Canada’s defense expenditures have been greatly reduced, both as a burden on the taxpayer and as a drain on exchange reserves, ever since the so-called Hyde Park Agreement that Mackenzie King arranged with Franklin Roosevelt in 1941. The principle is that instead of either paying American cash for American weapons, or making our own weapons in numbers too small to provide an economic run of production, Canadian plants make certain items for both Canadian and U. S. forces, and thereby earn the American money to pay for the other items our own forces require. The amount involved is about $300 million a year, not a large fraction of Canada’s $10 billion export trade. But if there were no defense-sharing agreement, $300 million would be a very large fraction indeed of our annual deficit of U. S. dollars.

THESE ARE EXAMPLES from a long list of special relationships between Canada and the U. S. Any of them, if suddenly brought to an end, would cause at best inconvenience, at worst economic ruin for Canadians. But the question is, how likely are they?

Not likely at all, say the Walter Gordon men.

“The Americans aren’t going to do any of these things, and we shouldn’t scare ourselves by thinking they will,’’ Gordon himself said in a recent interview. “Canadians underestimate the strength of our own position. The Americans have as much to gain as we have, if not more, from continued friendship with us. Sure, they could ruin us if they wanted to — but the country th y’d be ruining is one where they've already got about $25 billion invested. Their direct personal interest in Canadian prosperity is very high.

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HOW THE U.S. COULD RUIN CANADA continued from page 21

Walter Gordon: “I thought we behaved like scared children”

“1 thought we behaved like scared children when we talked about reprisals in the Mercantile Bank affair.”

To this, the Mitchell Sharp men reply that “reprisal” is a silly word; the real danger is quite different. It’s not a matter of direct, deliberate, specific action, they say; it’s a matter of atmosphere.

Nobody is going to forbid American investors to spend or lend money in Canada — but nobody’s going to command them to do it, either. It’s urgently necessary, in their view, that Canadian government and business remain on amicable terms with the American financial community.

For both factions, the most recent case in point has been the Mercantile Bank dispute. Each sees in this a good example of the dangers threatening Canada. and the proper way to avert them. They differ fundamentally on what the principal dangers are, and what protective measures are required.

The Mercantile fight began in 1963. James Rockefeller, president of the First National City Bank of New York, came to Ottawa to see Finance Minister Walter Gordon. He said Citibank had decided to buy Mercantile, a small Dutch-owned bank which was the only one in Canada under foreign control, but was small and had only a negligible share of Canadian banking business. Citibank, of course, planned to expand it.

Gordon warned Rockefeller that this expansion wouldn't be allowed. Citibank’s invasion would be sure to prompt similar moves by its competitor banks in the U. S.. and this the Canadian government was determined to prevent.

Citibank had not yet made any final commitment to buy Mercantile, Gordon pointed out, so the Canadian government would feel quite justified in passing retroactive legislation to forbid its expansion if, despite this warning, Citibank went ahead with its purchase plans.

Citibank did ignore Gordon's warning. did buy Mercantile, and did lay plans for its expansion. Before the Commons committee on finance last January 24, Rockefeller flatly denied Gordon's version of their 1963 talk. He had called on the minister merely as a courtesy, he said, to let him know of a purchase to which Citibank was already committed and from which it could not honorably withdraw.

But among the documents tabled before the committee was a memorandum from Robert MacFadden, the Citibank vice-president who had become president of Mercantile, which stated very clearly that the deal had not been final when MacFadden and Rockefeller saw Gordon, and that they had agreed to “clear it with the minister of finance” before making any

such final commitment. Louis Rasminsky, Governor of the Bank of Canada, with whom they made this agreement, confirmed it in his own testimony. Gordon was vindicated, the Citibank officials discredited. Canada's independence demonstrated for all the world to see.

So far. good. The new Minister of Finance, Mitchell Sharp, had taken the same stand as his predecessor Walter Gordon. The revision of the Bank Act. presented by Sharp, contained the same restriction drafted by Gordon: no bank would he allowed to expand in Canada if more than 25 percent of its shares were owned by a nonresident shareholder. As a result, this meant that Citibank’s purchase of Mercantile became virtually worthless, since Mercantile’s operations were too small to be profitable, and their expansion was expressly forbidden unless Citibank sold three quarters of the

Mercantile shares, presumably at a loss.

This result, however gratifying to Canadian pride, had not been achieved without tension between Ottawa and Washington. The U. S. State Department intervened energetically on the side of Citibank. U. S. officials were a bit crestfallen when the MacFadden memo tabled before the committee revealed that Gordon’s version of the 1963 meeting was the true one, and not Citibank's, but this did not change their position.

“We're not really interested in who said what to whom,” said Rufus Smith, former U. S. embassy counselor in Ottawa and now head of the State Department’s Canadian division in Washington. “What bothers us is the combination of retroactivity and discrimination [against the U. S.j in this new law.

"We fully understand your concern about the extent of American ownership in Canada, and we don’t intend to take any issue with your clear right to establish any ground rules you like. We might privately doubt the wisdom of these rules, but w'e would make no representations against them. Our concern is for U. S. companies entering Canada under one set of laws, and then having the rules changed after they get there.”

Did Smith think the Citibank dispute would have a serious effect on Canadian -American relations in future?

“I think it will leave scars. What that may mean in practical terms I just don’t know — I’m not trying to utter any threats — but this is a bad precedent. It’s bad for prospective American investors in Canada, but it’s also a bad example for other countries — bad for their attitude toward American investors, and bad for American investors' attitude toward them.”

What effect would it have on future U. S. laws?

“Again, I don't know. Obviously, though, if there were something before Congress of interest to Canada you’d be able to count on less congressional support than before.”

This prediction had already been confirmed to some degree. Congressman Paul Fino, Republican from New York, in January introduced a bill to provide federal control over “Canada’s multi-billion-dollar banking empire in the United States,” as a press release from Fino’s office called it.

“Now that Canada has made it clear that U. S.controlled banking in Canada is to be irrationally limited,” Fino said in an open letter to President Johnson, “the United States must take appropriate steps to show Canada that such financial nationalism does not pay . . . U. S. banking law should ‘speak softly but carry a big stick,’ so that Canadian banks in the United States can be curbed as Canada proposes to curb the U. S. - controlled Mercantile Bank ... I urge you to swing your powerful support behind this bill so that we can show Canada we mean business — so that for every dollar of U. S. banking operations in Canada interfered with, the Comptroller of the Currency will have power to regulate the tenfold-greater Canadian banking empire in this country . . . I believe the ill-conceived actions of Canada leave us no choice.”

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HOW THE U.S. COULD RUIN CANADA continued

How will U.S. investors react? “You’ve got them scared”

Fino announced his bill as a match for one introduced in the U. S. Senate last year by Jacob Javits, Republican senator from New York and often mentioned as a Republican vice-presidential nominee in 1968. Unlike Fino, Javits had no desire to pick a fight with Canada. He called a press conference of Canadian reporters to point out that his bill had no reference to Canada and was introduced before the Mercantile dispute came into the open.

But in a conversation in Washington recently, Javits made no secret of his view that Canadian legislation against the Mercantile Bank was a mistake. He doubted that the U. S. government would retaliate — “You’d have to press us pretty hard” — but as for U. S. investors, "1 think you’ve scared them.”

That was also the opinion of the more pessimistic among Canadian officials in Washington, and Canadian bankers in New York. None had met overt hostility or even criticism — partly, perhaps, because Citibank is a rough competitor whose troubles aroused more glee than sympathy. But the Canadians knew that this apparent tolerance could be misleading.

“What counts is not what they say, it's what they will do,” said one. “When an opportunity comes to invest in Canada, will they do it? Or will they put their money somewhere else?”

No clear answer to this question has yet emerged, but some people in Ottawa as well as Washington and New York were worried by it.

Bryce Mackasey. parliamentary secretary to the minister of labor and a member of the Commons committee on finance, went off to New York on his own initiative to talk to Citibank people. He told Sharp and Prime Minister Pearson that he was going, but he neither asked nor got authority to make any deal. His object was merely to break the ice. and apparently he succeeded. Later, more official, though still cautious, talks were held between Citibank and Clayton Elderkin, special adviser on banking to the Finance Department.

Two suggestions emerged. One was that Citibank might reduce its percentage of ownership in Mercantile not just by selling off shares at a loss, but by increasing its authorized capital and selling new shares to Canadian investors (a step that would require Canadian cabinet approval). The other, more immediate suggestion was that Citibank should be given more time — say. five years — to expand Mercantile up to a profitable size before being obliged to cut down to 25 percent ownership.

In the Commons finance committee February 22, Mackasey moved an amendment to this effect. Sharp indicated he was willing to accept it (though his own idea had been to allow extensions of time at the cabinet’s discretion, up to a maximum of five years). But the Mackasey version, with the fixed time of five years, passed the committee unanimously and went into the draft bill for presentation to the whole House of Commons.

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HOW THE U.S. COULD RUIN CANADA continued

Sharp-Gordon compromise: a thin patch over a wide split

Apparently, though, it had not been presented to the cabinet. Walter Gordon, the Minister Without Portfolio whose special task is to make a survey of American ownership in Canada (and whose special conviction is that American ownership jeopardizes the independence if not the very existence of Canada) reopened battle on the whole issue of Mercantile, and threatened to resign if the welcome mat were thus spread for First National City and. presumably, the competitor U. S. banks that would follow.

The Gordon group could not care less about soothing the wounded feelings of Rockefeller, MacFadden and company. They think American banks should be kept out of Canada. Gordon told Citibank in 1963 to stay out; Citibank ignored his warning; let it take the consequences. Far from being allowed extra time to get down to 25 percent of ownership. Citibank and any other foreign invader should instead be reduced to the 10 percent limit that applies to Canadian bank shares in general. (Nobody, Canadian or foreign, is to be allowed to acquire more than 10 percent of any bank's stock, though individuals who already hold more than 10 percent are not, in the present draft of the bank bill, obliged to sell off their extra shares. Thus Citibank, owning 25 percent of Mercantile, will enjoy a permanent advantage over all other banks in Canada, not only American but Canadian as well.)

Sharp, on his side, felt he had given his word to the Citibank people (who, this time at least, had been dealing in entire good faith) and that he could not go back on it. The difference of opinion was patched up. Sharp presented the bank bill in the form it had passed the committee, but he accepted (by prior arrangement) two amendments that sharply reduced the advantage allowed to Mercantile. One

replaced the five-year period of grace with a period at the cabinet discretion up to five years; the other forbade Citibank to acquire any new shares in Mercantile until Citibank's holding had been reduced to 10 percent.

But to many observers, this looked like a thin strip of paper over a wide and deep crack. The difference between Sharp and Gordon seems to them to be fundamental, not to be resolved by any mere form of words. The two men have almost opposite views on what is good for Canada.

The men who back Sharp don't share the apprehensions of the Gordon group about American intrusion into Canadian banking. Some of them say quite openly that American competition will be a good thing for the rather stuffy, rather conventional Canadian chartered banks. Some Canadian bankers agree, or so they told the Commons committee on finance.

Whether these contradictory views can be reconciled, within the confines of a single cabinet and caucus, the next few w'ecks will show. If they cannot. the L.ibcral government's days of greatest strain still lie ahead. ★